government failure Flashcards
define government failure
lack of incentives
In the public sector, there is limited or no profit motive. Because workers and managers lack incentives to improve services and cut costs it can lead to inefficiency. For example, the public sector may be more prone to over-staffing. The government may be reluctant to make people redundant because of the political costs associated with unemployment.
poor information
politicians may have poor information about the type of service to provide. Politicians may not be experts in their department but concentrate on their political ideology.
poitical intereference
Decisions made for short-term political gain – rather than sound economics, e.g. keep on unproductive workers. e.g. politicians may take the short-term view rather than considering the long-term effects
no consistancy
Change of government often leads to change of approach and new political initiatives
moral hazard
The government may offer a guarantee to all bank deposits to protect the financial system, but this could encourage banks to take risks – because they know they can be bailed out by the government.
unintended consequences
Policies to reduce relative poverty ‘means-tested benefits’ can create ‘welfare dependency.’ For those on means-tested benefits, moving from benefits to work could lead to very little extra income because of lost benefits and higher taxes. Benefits can then solve one problem of relative poverty but create new problems of higher spending and lower levels of labour market participation.
regulatory capture
When government agencies become too friendly with business/groups they are trying to regulate
special interest groups
In the US, many types of business have special tax credits for their industry; this makes it difficult to reform the tax system, and leads to horizontal inequality – business with same income can be treated differently. In the Europe, farmers receive substantial financial support from the EU, making it difficult to reform CAP. Once people are used to receiving subsidies it can be politically difficult for the government to take it away.
examples of government failure
white elephant projects
Concorde supersonic airliner was a joint venture between British and French government. It was seen as a prestigious venture, so even when studies suggested it was uneconomic, politicians didn’t want to back-track but kept putting in public money. Developing Concorde cost the British and French governments £1.1 billion (about £11 billion in 2003 prices) before it even went into service—nearly ten times what was budgeted.
tax leads to fly-tipping
A tax on rubbish is a policy to overcome market failure. To try and include the external cost of rubbish in the price. However, a tax on rubbish can lead to illegal dumping of rubbish on the roads. This creates a different problem of fly-tipping.
common agricutural policy
The CAP was intended to solve market failure in agriculture and protect farmers incomes, but the EU didn’t take into account minimum prices would lead to over-supply; there were also unintended consequences of trade wars and environmental problems from farmers trying to supply as much as they could.
prohibition strengthened mafia
When the government banned alcohol in the US, it caused the mafia to supply alcohol, leading to a rise in organised crime.
what can governments do to overcome government failure
Give performance targets/profit incentives
Competitive tendering – where public sector bodies face competition from the private sector for the right to run a public service.
Employing outside private sector consultants to make decisions about how to cut costs.
Delegating certain decisions to non-political bodies. For example, setting interest rates was given to the Bank of England as politicians often set interest rates for political reasons.
