Government failure Flashcards
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)
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.
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).
