Government And Market Failure Flashcards
What is market failure
This occurs when the market mechanism leads to a mis allocation of resources in the economy
Means society could’ve been better off if they were allocated in a different way.
Creates a welfare loss
What is complete market failure
This is when the market simply doesn’t exist to supply products at all
Market may fail to produce certain goods despite being in demand
Why might complete market failure happen
There may be barriers to entry
Results in a missing market, a missing market occurs at a pure public goods e.g national defence
What is a public good and why might they not be produced
Goods/services which provide benefits for consumers, but not any benefit to the producers e,g street lights
They may nit be produced as they do nit make any profit
What is partial market failure
This occurs when the market functions, but produce the wrong quantity of a good or service
E.g pollution, vaccines and information gaps.
When the market partially fails, the good or service may be provided to cheaply e.g cigarettes
Leads to over production + over consumption
What is government intervention
This is a regulatory action taken by the government that interfere with decisions made by individuals, groups and organisations about social and economic matters
The government intervene to overcome market failure and to improve the allocation of resources
E.g free healthcare
What are the aims of government intervention
Stabilising prices
Providing farms with incomes
Discouraging de merit goods
What does a pro free market economists mean
They believe that market mechanisms and price signals achieve an optimal outcome
They believe in limited gov/market intervention
The gov are there to just maintain law and order
Provided public + merit goods
Firms can compete competitively
What does an interventionist economist mean
Opposite to free market economists
They believe often markets are uncompetitive
This is due to monopoly power and other areas of market failure
Believes the government knows better than unregulated market forces
This is because they can predict and counter the destabilising forces and achieve better outcomes
What is government failure
This is when government intervention reduces economic welfare, leading to an allocation of resources that is worse than the free market outcome
What can government failure lead to
Leads to welfare loss and creates more problems than what existed before
What are the main causes of government failures
Distortion of price signal
Unintended consequences
Excessive administration costs
Information gaps
What is examples of causes of government failure
Political self interests/lobbying
Policy myopia - search for “quick fixes” - (Not of long term problems)
Regulatory capture
Information failures - (costs outweigh the benefits)
Disincentive effects - e.g poverty trap
High enforcement/ compliance costs - e.g does the people comply with the rules/laws
Conflicting policy objectives
Damaging effects of red tape - too many rules to follow - getting rid
Examples of government failure
Policy leads to greater inequality
Regulatory capture
Failure to rigorously test a policy
High enforcement costs
Unintended consequences
Conflicts with other policy aims
What is regulatory capture
When government officials (regulators) break off to other firms to put pressure on the current government at the expense of the consumer
