Government Failure Flashcards
Government failure
When a government intervention leads to an inefficient allocation of resources and decline in economic welfare
Causes of government failure
Moral hazards
Lack of profit incentives- public sector
Poor information- goods and services to provide as public goods
Taxation
Consequences of government failure
Inefficiencies-DWL- society welfare decreases
Unintended consequences- moral hazards - e.g banks exploiting consumers
Inconsistent- frequent govt intervention can cause interruption in continuity- decrease market stability
Types of govt intervention
Subsidies
Indirect taxes
Price controls
Information provision
Competition policy
Pollution permits
Regulation
Legislation
Regulation?
Enforcement of rules and laws to govern behaviour of businesses and individuals within a market
E.g monopoly laws to limit power of monopolies
Minimum pricing
Govt set a minimum price on what a good or service can legally be sold
E.g Scotland setting 50p min price for alcohol per unit- reduce overconsumption
Maximum pricing
Government imposing a price ceiling for a good or service to make it more affordable
E.g train tickets set at a max price to make it more affordable and avoid exploitation
Tradeable pollution permits
Government issue firms with permits regulating how much they can pollute up to
Going over the permit will lead to firm having to buy permits
Going below allows a firm to sell excess creating a market for these permits
What does Tradeable pollution permits hope to solve
Over production of goods with negative externalities for example decreasing pollution and
Push production closer to msc caused
Pros and cons of Tradeable pollution permits
Pros
Reduce pollution
Govt revenue
Cons
Admin and setup costs- govt failure
Knowledge of level of pricing too high or low could cause govt failure
Provision of public goods
E.g defence
Yes
Nonprofit motive - utility increase- reduce inequality
Key for social welfare govt will aim for AE
Dynamic effiecency
All sectors need public goods
No
Opportunity cost
Free market may be more competitive and lower pricing
Govt may charge higher prices to stimulate DE
Govt failure
X inefficiency
