government failure

Question 1

What is government failure?

Answer 1

-Government intervention to correct market failure leads to a greater net social welfare loss

-costs of intervention exceed the benefits

-gov policy fails to change behaviour outcomes as much as intended

Question 2

CAUSES: political self-interest and regulatory capture

Answer 2

-Pursuit of self interest amongst politicians - they look for quick fixes rather than a considered analysis of long-term considerations-they want to win votes

-Regulatory capture-when government agencies operate in favour of the producers

-Rent seeking behaviour- the use of political power to manipulate the distribution of resources for themselves at the expense of others without creating any extra wealth for society

-Example: 2013-plan for minimum price of alcohol dropped- BBC report states the government met with representatives of the drink industry 130 times between 2010-2014

Question 3

CAUSES: unintended consequences

Answer 3

-Consumers act in very unexpected ways
-opposite effects to those intended

-Example: implementing seatbelts resulted in more vehicle fatalities due to recklessness

Question 4

CAUSES: imperfect information

Answer 4

-Governments may implement a policy without having full information required for a cost-benefit analysis (it may be time consuming and expensive)

-Assumptions are made - sometimes incorrectly - difficult to get total information

-Example: difficult to quantify external costs of pollutants - need to target the most prominent pollution contributors

Question 5

CAUSE: distorts price mechanism

Answer 5

• Taxation can encourage people to avoid taxes or evade them
  -subsidies may encourage wasteful misuse or overuse of scarce resources - protect inefficient firms from open competition and create barriers to entry for new firms - prices are kept artificially low

-maximum prices create shortages
-minimum prices create surpluses that need to be stored

Example: cotton farmers- subsidies create excess supply that needs to be stored then bought by gov- scarce resources are wasted
-May still be cheaper to import from abroad
-Opportunity cost-better spent elsewhere

Question 6

CAUSES: Costs of administration and enforcement

Answer 6

-Social benefits might not be more than the financial costs of implementing the policy

-Could lead to the principal-agent problem as the government and all the managers goals are not aligned and there is a conflict of interest - need to ensure its objectives are pursued by managers of public sectors like the NHS