Government Failure Flashcards
How can government intervent to correct overconsumption?
Information provision
Tax
Min price
Regulation
How can government intervent to correct underconsumption?
Information
Subsidies
Max price
Regulation
8 main types of government intervention
Tax Subsidies Min/max pricing Regulation Information State provision Tradeable pollution permits
Tradeable pollution permits
Cap and trade scheme-government issue permits to firms on how much they can pollute. If they require more, they can buy more or trade
Evaluation of tradeable pollution permits (2)
How many to issue: Difficult
Too many-permits become cheap so firms continue to pollute and not try change
Too little-becomes too expensive, may hide pollution, move abroad or invest less.
Admin costs of running the scheme, potentially regulatory caputre
Causes of government failure (9)
Best to know main 6
Distortion of price mechanism Unintended consequences Admin costs Information gaps Regulatory capture Moral hazard Conflicting objectives Policy myopia Political self interest (public choice theory)
Distortion of price mechanism
Government intervention puts market in disequilibrium when prices get too high/low
Distortion of price mechanism: Max pricing
Causes excess demand/shortage. Reduced incentive to supply so contracts, and quality may fall to cover costs.
Distortion of price mechanism: Min pricing
Excess supply:firms can’t sell, negative impact on workers etc
Excess supply also creates waste bad for environmement (neg. production externality)
Policy myopia
Politicians looks for short term solutions rather than long term. e.g subsidies can create inefficiencies
Public choice theory
Politicians pursue self interest by aiming to maximise their utility rather than people they represent
Moral hazard and example
Takes greater risk because someone else carries the burden.
in the financial crisis, banks took greater risks as they knew they were too big to fail so gov would bail them out
