CH21 Government failure

Question 1

what are the different factors from which government failure can arise?

Answer 1

government failure can arise from:
-the distortion of price signals
-excessive administrative costs
-information gaps
-conflicting objectives
-the maximisation by politicians of their own welfare

Question 2

When does government failure occur?

Answer 2

government failure occurs when the gov intervenes in the market but this intervention leads to a net loss of economic welfare rather than a gain.
-so in other words, gov failure arises when the total social costs arising from intervention are greater than the total social benefits which are created by that intervention.

Question 3

what is a problem with imposing a very high minimum wage?

Answer 3

it may be so high that employers shed low-paid workers, putting out of work large numbers of people whom the government wanted to protect.

Question 4

give an example of unintended consequences (hint: the implementation of CAP)

Answer 4

-when member countries of the European Union first implemented Common Agricultural Policy (CAP) in 1962, they did not foresee what a boost it would give to agricultural production.
-The result was that in the 1970s and 1980s, most of the EU budget was spent on CAP and EU consumers paid much higher prices for food than if CAP had not existed.
-another unintended consequence of CAP was that it depressed world prices of certain agricultural products. Under CAP, the EU bought up certain agricultural products at a minimum price. It then disposed of the produce by selling it below that price onto world markets. Farmers in rich countries like the USA and New Zealand suffered lower prices for their produce as a result. But so too did some farmers in developing countries round the world who couldnt compete with the low EU prices

Question 5

what is public choice theory?

Answer 5

theories about how and why public spending and taxation decisions are made.

Question 6

what does public choice theory suggest about politicians?

Answer 6

it suggests that politicians act in a way that maximises their own utility whether or not this leads to improved welfare for the citizens they are supposed to represent