Government failure Flashcards
(34 cards)
Government failure-
When government interventions to correct one or more market failures leads to a greater net social welfare loss - failure can also occur if a policy fails to create enough of an incentive to change the behaviour of different agents to meet the aims of a policy
Causes of government failure
Inaccurate information about the true costs and benefits of a policy
When information is distorted by special interest groups
Principal-agent problems
Public choice theory - states state officials are driven by self-interest rather than public interest
The government’s responsible for setting up regulators to control industry’s behaviour.
Principal agent problems
When the interests of the government and people implementing the policy aren’t aligned
E.g. shareholders look for short term value, but CEOs in a company look for long term value, and they both have different self-interests
Examples of government failure
Policy leads to greater inequality(basic income tax rate fell from 33% to 22% for workers to keep more income, but this favours the richest households more, so has led to an increase in income inequality)
Unintended consequences(criticism of young people’s mental health in lockdowns) - the price of travel permits needed by EU and US citizens to enter the UK is to rise from £10 to £16, to reduce the reliance of the migration and borders system on taxpayer funding.
Additionally, while the New York congestion pricing scheme intends to cut traffic and help fund $15bn to improve local mass transit/transportation, this $4.50-$14.4} toll to enter the congestion zone may be difficult for all consumers to pay, extra cost for consumers).
Bus passengers face a new £3 cap, money raised supports travel in rural communities and towns, but this can also make consumers more reluctant to use the bus due to higher costs.
An increasing clawback tax has made drugmakers frustrated with the NHS, as pharmaceutical companies are warning investment may be at risk.
High enforcement costs
Regulatory capture(regulators start acting in the interests of the company, due to impartial information, rather than in consumer interests e.g. after the financial crisis of 2008, there was financial regulatory capture in the bank8ng sector, with regulators becoming so comfortable that this resulted in incomplete supervision of rules and regulations in banks)
Failure to rigorously test a policy
Conflicts with other policy aims(e.g.taxes to reduce inequality could lead to higher rates of inflation)
Government objectives for industries
Efficiency
Equity
The law of unintended consequences
The idea an action can have unanticipated outcomes, both positive and negative
Example of unintended consequences
A carbon tax may lead to a reduction in emissions, but it could also lead to companies offshoring their operations to countries without a carbon tax or passing the cost of tax onto consumers.
Distortion of prices
When the government intervenes in markets, it can cause a distortion of price signals by artificially changing the price of a good or service.
Example of price distortion
To ensure farmers a minimum income, the government can provide subsidies for domestic agricultural products. This will lower the market price, leading to an increase in demand and consumption , but can also cause a misallocation of resources and an inefficient use of productive capacity.
Another example is when the government imposes a price floor, such as a minimum wage, which will cause unemployment, as firms will be reluctant to hire workers at the higher wage e.g. Biden’s administration couldn’t overcome opposition to raising the federal minimum wage.
Price mechanism functions
1) Signalling functions(to producers and suppliers, so the right quantity of a good is supplied at the price a consumer’s willing to pay).
2) Allocative function(allocation of scarce resources depends on the price mechanism)
3) Incentive function(the price mechanism incentivises the entrepreneurs creating businesses to produce goods and services).
4) Rationing function(when demand outweighs supply)
Examples of the price mechanism rationing
Plane tickets might rise as seats are sold, because spaces are running out. This is a disinentive to some donsumers to purchase the tickets, which rations the tickets.
Government policy and information failure
Information failure can lead to the implementation of government policies not based on accurate information about the social costs and benefits of one or more policies, with these policies designed to solve one problem, but end up creating unintended consequences.
Consequences of government policy and information failure
It can lead to a lack of trust in the government and the policies it implements- in 2024, problems with the NHS and the ‘cost of living crisis’ mean in Britain, a record high of 45% now say they almost never trust governments of any party to place the needs of the nation above the interests of their own political party.
It can lead to inefficient allocation of resources(net social welfare loss).
Conflicting objectives and government failure
Government failure can be caused by policies that lead to a conflict of objectives(
problem of multiple goals).
When the government pursues multiple goals through its policies, it can often end up with conflicting objectives.
Example of conflicting objectives and government failure
Environmental policy- where the goal of protecting the environment can conflict with the goal of economic growth and keeping prices low.
Labour reform(2024-25) means NHS bosses are given fewer targets to focus on issues that matter most to patients(e.g. improved access to GPs and dentists, and cutting waiting times for operations, and urgent and emergency care: tendency to create too many targets in healthcare, with an excessive focus on hitting these meaning patients could be disastrously neglected themselves.
Joe Biden’s $1.9 trillion American Rescue Plan in 2021- which provided direct stimulus payments to households - played a critical role in raising the cost of everyday essentials such as eggs and rent.
Donald Trump’s plans for higher tariffs,
lower taxes and curbs on immigration risk reviving inflation and preventing the Federal Reserve from cutting interest rates - would cause negative shocks to supply of US goods
Economic goals of government(and examples of conflicting objectives)
Economic growth(can’t achieve economic growth without attracting rich foreigners to the country)
To reduce unemployment(e.g. if the British Government had given Tata Steel more money to switch to electricity(subsidy),more people would have stayed in employment)
To maintain price stability
To achieve equity
What is regulatory failure/capture?
A type of government failure that occurs when regulation fails to achieve its intended purpose e.g. hundreds of sites with permission for high rise housing are standing empty, because the new Building Safety Regulator is struggling to process them, eight years after the tragic Grenfell Tower fire.q
Reasons for regulatory failure/capture
The regulators may not have the information or resources they need to effectively regulate.
The regulators may be captured by the industry they’re regulating, leading to weak or ineffective regulations(e.g. teachers may be biased if chosen to regulate OFSTED - conflict of interest).
Finally, regulators may be subject to political pressure, which can result in regulations that are not in the public interest.
Constantly changing rules which businesses struggle to keep with
Mission creep - expanding a project/intervention beyond its original scope/focus/goals
Ministers are risk averse
Consequences of regulatory failure
Regulatory failure can have serious consequences, including a loss of public trust in government and the failure of regulation to achieve its intended goals.
Examples of government failure due to government interventions
Government introduces an import tariff on steel to protect profits and jobs in domestic steel manufacturing firms - Tariff increases costs for car and construction companies
Smoking ban is introduced in all public places including pubs and restaurants-
Increase in litter/emissions from outdoor patio heaters
Government introduces landfill tax(on weight of waste sent to registered landfill sites)- Rise in illegal fly-tipping of waste
Government announces £10bn project to widen the M25 as a way of reducing traffic congestion -
The majority of vehicles are running on fossil fuels,induced demand - increased supply causes more vehicles
When does regulatory capture happen?
When regulatory agencies become sympathetic to the commercial interests of the regulated industry. This can be the result of lobbying(political pressure) by corporations, for policy outcomes to suit their commercial/financial interests.
Example of UK government intervention
A UK steel safeguard measure - a quota(limit) on imports of certain steel products and a 25% tariff on imports above the quota, to protect the UK domestic steel industry from a surge in imports.
Worries the UK Steel industry doesn’t produce sufficient quantity to meet existing demand(they’ll see a rise in costs).
Steel is an intensively traded product - a glut on steel on global markets has depressed its value. Steel industries are often heavily subsidised by national governments - production levels exceed what the market would otherwise dictate.
Examples of possible government failure from imposing quotas and tariffs on imported steel into the UK
1) Tariffs and quotas lead to higher costs for downstream users of steel. It might lead to higher construction costs, which makes new housing less affordable or e-vehicles more expensive(unintended consequences).
2) Risk of other countries imposing retaliatory trade barriers - this can cost jobs in other export industries
How tariffs impact consumer surplus
A tariff would increase the price, decrease the quantity and reduce the consumer surplus, but increase the producer surplus
