government failure Flashcards
how does market fail
positive externaltiites
negative externaltities
info gaps
public goods
how does governemtn correct market failure
taxes
subsidies
trade pollution permits
minimum and max pricing
regulation
info provisioning
gov failure
when gov intervenes and makes market failure worse than it actually was before
reasons for gov failure
distortion of price mechanism
law of unintended consequences
administration costs
info gaps
distortion of price mechanism through maximum pricing
examples of max pricing is rent controls
setting max price below equilibrium
but lower prices reduce producer incentive to supply
-leading to excess demand or shortage
(forcing people to move out of city)
new york- maximum pricing to help mor epeople access housing
but this distored price mechanism, forces market into disequilibrium
,reduces firm incentive so reduces quantity supplied
(landlords dis incentivised to look after property at lower prices)
distortion of price mechanism through minimum pricing
70s eu set common agricultural policy
set minimum pricing on food
eu wants to keep prices high to incentivise farmers so europe has secure food supply
-rationed consumers demand for food
so excess supply//surplus for food
min price incentivised producers to over produce
- supply gone to waste(disposing of excess leading to land fill, pollution)
gov policy has unintended consequence
1930s in india, gov giving people cash rewards to kill cobras, then breeded own and killed them
gov gave cash in return
then government stopped the scheme
no driving policy in mexico, intended to reduce pollution, people then bought a second car
or black markets
getting cannabis illegally after ban
criminals smuggling cigarettes in from abroad
info gaps
in 2008 lenders started losing money. lehman brothers etc went bust. 2008 financial crisis, us gov failed lending
if he knew of bank activity, he couldve prevented the crisis
miscalculating external costs
budgeting for new projects
e.g. 2002 taking nhs online, incomplete bc gov underestimated time and costs involved
(wasted 11 billion of tax payers money)
rio 2016 ran 1.6 billion dollars over budgetbrazilian gov uniformed of costs
administration costs
750 more lives could be saved each month if nhs could give more supplies
despite 150 billion budget
money absored by admin costs
(paper work, legal fees, secretaries) 21 billion goes to admin costs
or trade pollution permits, regulators hired to ensure firms did not exceed limit, monitoring costs exceeded (more than what it cost to regulate pollution levels)
Law of unintended consequences
Government intervention can have negative unintended consequences.
E.g. a tax on cigarettes can create a black market where cigarettes are sold without tax.
Administration costs
The miscellaneous costs of government intervention.
E.g. paperwork, legal fees, secretaries, managers.
information gaps
the government lacks the information needed to intervene most efficiently.
E.g. the government doesn’t know what size to set for its carbon tax.
Distortion of the price mechanism
Government intervention can distort the price mechanism.
E.g. a minimum price will create excess supply between Qd and Qs:
E.g. a maximum price will create excess demand between Qs and Qd:
