Government Failure Flashcards
Gov failure
When a government’s intervention in a market reduces overal economic welfare
Regulatory capture
Where a good government agency acts in favour of producers rather than the consumers
Political self interest
The pursuit of self interest can lead to a misallocation of resources
The pressures of a looming election may lead to different policies in order to get re elected
Furthermore pressure groups and interest groups can sway the government and lead to un equitable policy
Policy myopia
Where the gov have tendencies to impose short run and quick solutions rather than making an analysis of long term considerations
Doesn’t address structural problems in an economy
Disincentive effect
Free market economists argue that attempts at reducing income and wealth inequalities can worsen incentives and productivity
They argue against the minimum wage as they believe it raises the wage above their true free market level and can lead to real wage unemployment
They argue against raising higher rates of income tax as it has a negative effect on the incentives of wealth creators and reduces the incentives to work more hours or take a higher paid job
Government intervention and evasion
A decision by the government to increase taxes on de merit goods such as cigarettes might lead to an increase in attempted tax avoidance,tax evasion, smuggling and the creation of grey markets
A decision to legalise some drugs might lead to a rapid expansion of the supply of drugs and a substantial loss of welfare form over consumption
Policy decisions based on imperfect information
Impossible for the government to truly know what the true preferences of the public are
Often the government will go ahead with a project or policy without having the full amount of information required for a proper cost benefit analysis- can have damaging consequences in the long run
The law of unintended consequences
The law of unintended consequences is that actions of consumers and producers and especially of the government-always have effects that are unanticipated or unintended
Cost of administration and enforcement
Government intervention can prove costly to administer and enforce
The estimated social Benefits of a particular policy might be largely swamped by the admin costs of enforcing it’s
4 key points about government failure
1) Free market economists are distrustful of intervention- they believe that the price mechanism should be given freedom to operate
2) often we can acuse the government of policy failure only with the benefit of hindsight
3) limited information- no government has the resources and information available to it, to make fully informed,objective judgements
4) government failure is most likely to occur when decisions are made in the vested interest of special interest groups at the expense of other groups (loss of equity)
Conflicting objectives
Conflicting objectives may lead to a misallocation of resources
Market distortions
Attempts of governments to correct market failure may lead to insufficiencies, surpluses and shortages.
For example a maximum price on aspects of healthcare such as prescriptions may lead to excess demand while a min wage may lead to excess supply of albor and is effectively unemployment
