Government Failure Flashcards
When does government failure occur
When government intervention in the economy leads to a misallocation of resources
What are some possible sources of government failure
Inadequate information, conflicting objectives and administrative costs
Governments may..
Create rather than remove market distortions
Government intervention can lead to..
Unintended consequences
What marked the failure of command economies as a means of allocating resources among competing uses
The collapse of the Soviet Union in the late 1980s
Failing of the pure command economy
- central planners produced products that were not wanted (loss of allocative efficiency)
- little incentive for workers to raise productivity
- poor quality control
- little innovation
What is the law of unintended consequences
That the actions of consumers, producers and the government always have effects that are unanticipated or ‘unintended’
What may develop as a result of the law of unintended consequences
Shadow markets may develop to undermine an official policy
Examples of unintended consequences
Bio-fuel subsidy - may divert production away from food, cause food price inflation and this then hits the poorest in society
Examples of regulatory failure
- regulators may limit innovation in fast-growth markets
- capping prices might prevent new firms entering a market
- regulation is costly
- frequent rule changes can stifle business investment
Key points about government failure
- free market economists are distrustful of intervention
- often we can accuse government failure only in hindsight
- no government has perfect information
- gov failure often occurs when they act with the interest to certain groups only
