Gov failure

Question 1

define gov failure

Answer 1

when the costs of intervention outweigh the benefits of intervention
= worsens the allocation of scarce resources= further worsen the pre-existing market failure= harming social welfare

Question 2

causes of gov failure

Answer 2

• info failure
• admin and enforcement costs are high
• unintended consequences
• regulatory capture

Question 3

how does info failure cause gov failure

Answer 3

• gov and politicians don’t have perf info= lack necessary info to make effective policy decisions
• when valuing externalities, perf policy would be to internalise NE to make sure they’re being accounted for in private sector= ensure Q is @ social optimum level
  BUT
  if externalities cant be valued accurately, policies may be too strict or too relaxed
  = ineffective policy with significant costs that outweigh the benefits of the policy

Question 4

how do high admin costs cause gov failure

Answer 4

• regulation has high admin and enforcement costs= must hire police and regulators
  = wo heavy and strong regulation it won’t be effective as consumers will find loopholes= high risk of gov failure depending on available finances to regulators
• subsidies and state provision= high costs to enforce and regulate

Question 5

how do unintended consequences cause gov failure

Answer 5

• high tax and regulation can lead to black markets= seen in UK with cigarettes and alcohol
• negative impacts on the poor= regressive tax and min prices unevenly creates costs for the poor
• impacts on firms as a result of overstrict regulations and taxes= force them to shut down or relocate= increase unemployment
• firms may become more dependent or wasteful due to subsidies
  = costly to gov debt
• state provision= excess demand

Question 6

how does regulatory capture cause gov failure

Answer 6

• interests of society are overlooked for the interests of CEOs, managers and firms in the industry
  = CEOs etc influence the regulator due to close contact or personal relationships to reduce the extent of the regulation to work in the interest of the firm, not the public and society
• when Govs regulate monopoly power= prices may not be changed enough to benefit society and consumers

Question 7

define economic welfare

Answer 7

a more rounded measure of progress in improving people’s lives taking into account for examples changes in health and education outcomes, the level of income and wealth inequality and feelings of security for individuals and their families

Question 8

define economic growth

Answer 8

an increase in the productive capacity of the economy and also an increase in real national income

Question 9

EVALUATION OF GOV FAILURE

Answer 9

• depends on info gov has on market
  = Govs may not have perf info= leading to poorly targeted policies
  = E.g. subsidies may go to firms that don’t need them
• Intervention can be costly to implement (monitoring, enforcement)
  = lead to inefficient allocation of resources
• Policies (like tax changes or regulation) take time to have an impact
  = markets might correct themselves in the meantime
• Some interventions help in the short run (e.g. price ceilings), but damage incentives or efficiency long term
• Interventions might increase equity (fairness) but reduce efficiency.
  E.g. Progressive taxes reduce income inequality but may reduce incentives to work
• Intervention might look inefficient now but could lead to better long-term outcomes
  = E.g. Renewable energy subsidies may be costly now but reduce dependence on fossil fuels
• If government fails, can the private sector do better? Not always
  = E.g. Private prisons, education, or healthcare may have their own failures