Government Failure

Question 1

What is government failure?

Answer 1

It is when government intervention worsens the allocation of scarce resources

Question 2

What are the characteristics of Government failure?

Answer 2

It results in a greater net welfare loss

The cost of the intervention outweighs the benefits gained

The policy fails to generate a change in behaviour by economic agents and so the policy fails to achieve its aims

Question 3

What are causes of government failure?

Answer 3

Political self interest

Poor value for money

Policy short-termism

Regulatory capture

Conflicting objectives

Bureaucracy and red tape

Question 4

What are the outcomes of government failure?

Answer 4

Greater inequality eg: effects on low income households

High costs of compliance and implementation

Possible unintended consequences

Possible conflicts with other micro or macro objectives

Poor policy choice/outcomes - information failures before a policy is introduced means the government may lack information

Policy may prove ineffective in changing behaviour

Question 5

What are unintended consequences?

Answer 5

Outcomes that were not foreseen and intended by the government action

Question 6

What are characteristics of unintended consequences?

Answer 6

Some are positive and others are negative

It is impossible for the government to predict outcomes accurately for the economy - these are inevitable

Unintended consequences can deepen any existing market failure

Question 7

What are examples of unintended consequences?

Answer 7

Indoor smoking ban increases the use of environmentally unfriendly patio heaters

Charging for plastic bags encourages a switch to canvas bags which could be worse for the environment

Question 8

What are arguments against government intervention?

Answer 8

If there is likely to be a government failure after an intervention there may be a case for no intervention:

• When the price mechanism is very efficient and can promote innovation
• When resources are scarce, higher prices are potentially a good outcome
• Profit motive incentivises businesses and entrepreneurs

Question 9

What are arguments for government intervention?

Answer 9

There are many features in an economy when government intervention is required:

Allocation of property rights and legal system

Provision of public good

Macroeconomic stability

Measures to reduce inequality

Rules about competition