Governemt failure Flashcards
Government failure is when
government intervention to improve efficiency in the markets leads to an allocation of resources that is less efficient than before so that there is a net social welfare loss
Causes of government failure (6)
Information failure, administrative costs, market/price distortions, conflicting objectives, regulatory cap, unintended consequences
Government failure in various markets (agriculture, environment, transport, housing)
Agriculture - market distortion (CAP increase incomes for EU farmers but reduces significantly incomes for farmers in LEDCS)
LOOK AT PAGE 110 FOR REST
Explain unintended consequences
Policy undermined making it more expensive to implement e.g. taxing alcohol to improve health but rise in black market supply reduces health
Excessive administrative costs
Social benefits of a policy might not be worth the financial cost of administering the policy - might cost more than the government anticipated - the government has to consider whether the policy is good value for money
The cost of implementing the reform may be greater than the additional benefit received
e.g. the cost of OFSTED may be more than the benefits it creates in school performance
Information gaps
Some policies might be decided without perfect information requiring full cost-benefit analysis and it could be time-consuming and expensive however it is impractical for governments to gain every bit of information needed so assumptions are made
e.g. government sets a tax on negative externality but does not match the value of externality and thus makes the allocation worse
Regulatory capture
Regulators like OFGEM protect people from exploitation by large firms however argued that they operate in interest of firm not consumer
Conflicting objectives
Government tried to achieve one objective but reduces chance of meeting another e.g. wants economy to be efficient and be equitable (fair)
