Government failure

Question 1

Reasons for gov intervention

Answer 1

• Public goods.
• Merit goods.
• Tax de-merit goods.
• Subsidise merit goods or private goods.
• Regulations for safety.
• Fines to change behaviour.

Question 2

Gov failure

Answer 2

to occour when gov intervention in a market leads to a missallocation of rosources // loss of welfare for consumers.

Question 3

Reasons for gov failure

Answer 3

• Inadequate infomation.
• Unintended concequences
• Market distortions
• Administrative costs.
• Regulatory capture
• Conflicting objectives.
• Short termism of politicians

Question 4

Reasons for gov failure - explained

Market distortions

Answer 4

• attempts to correct market failure may lead to inefficiencies, surpluses + shortages.
• e.g. max rent = landlords sell proporties or charge illegal rent.
• e.g. NHS filling max price = switch to private dentists as wait becomes longer.

Question 5

Reasons for gov failure - explained

Regulatory capture

Answer 5

• said to occour when regulatory bodies set up to oversee behaviour of privatised monopolies become unduly influeneced by firms they have been set up to moniter.
• Because to an extent, regulators depend on existance of dominent firms in such industries for their existance.
• if industry wants to increases price, may give pessimistic forecast to regulator - if falls for it + agrees to increase price = captured

Question 6

Reasons for gov failure - explained

Conflicting objectives

Answer 6

NHS v Education

Question 7

Reasons for gov failure - explained

ST of politicians

Answer 7

political cycle

Question 9

Reasons for gov failure - explained

Unintended concequences

Answer 9

• A gov seeking to reduce consumption of a demerit good may impose a min price per unit.
• Arguably may lead to more harmful intoxicants becoming relatively cheap - encouraging greater consumption w/ associated impacts on healthcare and policing.
• Progressive taxes may lead to disincentive effect and brain drain.
• Taxes hit poor harder.
• unforeseen

Question 10

Reasons for gov failure - explained

Administrative costs

Answer 10

• Possible for costs of researching and implementing any intervention may outweigh benefit of policy itself, leading to worse missallocation.
• Admin costs > benfits = gov failure

Question 11

Reasons for gov failure - explained

Inadequate info

Answer 11

• Govs often act w/ imperfect info.
• Subsequent indirect taxes or subsidies are unlikely to completely internalise these externalities and lead to the social optimum or allocatively efficent.
• e.g. if tax too low on tobacco = ineffective