Government Failure Flashcards
What is government failure?
When government failure leads to a net loss in economic welfare.
What are the 5 potential reasons for government failure?
1) Unintended consequences.
2) Distortion of price signals.
3) Excessive administration costs.
4) Information gaps.
5) Poor government decision making.
What are the 5 influences on government policy decision making?
1) Political party loyalties.
2) Information gaps.
3) Self interest.
4) Interest of constituents.
5) Short-sightedness.
What is the law of unintended consequences?
That the actions of people will always have effects that are unanticipated or unintended.
What is an example of an unintended consequence of setting a maximum price to reduce rent prices resulting in government failure?
If rent prices are excessively high, the government may impose a maximum price. However, this may disincentivise landlords to supply accommodation, reducing supply, meaning more people struggle to find accommodation.
How can governments create distorted price signals?
The imposition of maximum/minimum prices, taxation and subsidies can create false price signals causing inflation, uncompetitive industries being supported, and the inefficient allocation of resources.
How can an increase in the minimum wage cause market failure?
Firms may cut back on their lowest-paid workers in order to reduce their labour costs.
How can information gaps cause government failure?
No matter the policy, if information gaps exist in a market, consumers will be unable to make rational economic decisions and firms gain an opportunity to distort prices.
How did the Common Agricultural Policy (CAP) cause government failure?
The CAP aimed to securing reasonable and secure incomes for farmers in the EU, mainly through guaranteeing minimum prices for agricultural products. This resulted in the oversupply of some agricultural goods. Governments then sold this excess supply outside of the EU, impacting non-EU farmers’ incomes.
How could subsidising public transport result in government failure?
Many see public transport as an inferior good, preferring to drive, cycle, walk, etc. This subsidy then becomes a misallocation of resources, with the number of car journeys failing to fall, and issues like congestion and pollution remain.
How did fishing quotas imposed by the EU cause government failure?
The EU introduced fishing quotas to ensure the stability of fishing stocks by preventing overfishing. Fish stocks continued to fall, suggesting the quota was set too high. Furthermore, fishing boats dumped dead fish back into the ocean in order to not breach their quota
