Governemnt Failure Flashcards
4 elements of market failure
negative externalities
positive externalities
public goods
information gaps
6x How can a government correct market failure
tax
subsidy
pollution permits
minimum price
regulation
providing information
what is government failure
when government in markets makes the situation worse
Types of government failure
disruption of price mechanism
law of unintended consequences
administration costs
information gaps
maximum price
NY- rent control
max rent
far below the equilibrium price
government failure definition
when the government intervenes to correct market failure but makes the allocation of resources worse
Impact of minimum price
reduces incentive to supply which leads to excess demand and low supply to ensure quality of product.
This was seen in the US with rent control leading to poor quality housing
Minimum price of food- EU example
Increasing supply led to over farming so meet higher supply. This over supply meant that did create surplus wasted food which led to this being wasted and damage to the soil and the ground. Therefore government failure occurred.
Definition of law of unintended consequences
when the government takes an action there will be a reaction which is unpredictable in both its form and its implications
example of black markets
markets which open up to supply a good when that good becomes illegal
information gaps
gaps in banks information given to the federal reserve bank which let to leighman brothers collapse.
Example of government failure
financial crisis
Example of information gaps
when the NHS was attempted to become put online.
Unseen cost and time to doing this.
scrapped before completion with high cost
information gap was the lack of knowledge of the cost of this action
Examples of admin costs
paperwork
secretaries
managers
tax collectors
legal fees
IE 21bn admin costs in the NHS which leads to government failure
Definition of the price mechanism
when the government indirectly and unintentionally breaks down market price structure
