Government Failure (1.4.2) Flashcards
What is Government Failure?
When Government Intervention ends up creating further market failure in the market and leads to net welfare loss and a misallocation of resources as trying to correct market failure
What are the causes of government failure?
- Distortion of price signals
- Unintended Consequences
- Excessive administration costs
- Information Costs
What does distortion of price signals mean as a cause of government failure?
Distortion of price signals refers to a situation where government intervention, such as subsidies, taxes, or price controls (like price floors or ceilings), causes prices to deviate from what would naturally occur in a free market. In a market economy, prices act as signals to consumers and producers, guiding their decisions. When the government intervenes in a way that distorts these signals, it can lead to inefficient allocation of resources.
Price intervention may help solve one problem but creates other
What does Unintended Consequences mean as a cause of government failure?
Some interventions cause effects which the government did not intend to happen. Consumers and producers may react to new policies in unexpected ways and so the policy doesn’t have the effect it should. Producers and consumers aim to maximise their self interest.
This often leads them to look for legal or illegal loop holes to bypass government intervention. This result creates unintended consequences such as the creation of illegal markets and/or illegal production/consumption
What’s a real-life example of Unintended consequences?
In July 2007 an indoor smoking ban was implemented in the UK. Unintended consequences of this policy included:
-Congestion around office & restaurant doorways
-Increased use of outdoor patio heaters, thus increasing CO2 emissions
-Increased cigarette stump littering
What does Excessive administration costs mean as a cause of government failure?
Lots of money that is allocated by the government is actually used up on basic administration costs. The social costs may be higher than the social benefits, once administration costs are taken into account. Regulation or administration costs can be expensive. The costs can sometimes be greater than the savings in social welfare
What does Information gaps mean as a cause of government failure?
Any decisions the government makes must be based on some data but the information they have is always going to be limited. Cost and benefit forecasts are often wrong and so the government invests in a system where the costs are higher than the benefits so there is a welfare loss.
What’s a real-life example of Information gaps?
-Defence Information Infrastructure, a secure military network owned by the United Kingdom’s Ministry of Defence (MOD), cost £7.1bn to create compared to the original budget of £2.8bn. (and it did not meet most of the operational targets that the MOD had originally envisaged)
-NHS National IT Programme. Abandoned in 2013 after more than £10bn was spent on it. It never worked
