Government Failure Flashcards
Government Failure
Occurs when government intervention leads to a net welfare loss compared to the free market solution.
Examples of Government Failure
Distortion of Price Signals - eg imports of wheat/rice are cheaper than the cost of production for farmers. If government impose a tariff on imports, farmers are able to stay in business, however, consumers end up paying more.
Unintended Consequences
Excessive Administrative Costs - Sometimes, administrative costs of correcting market failure are so large, it outweighs the welfare benefit from the correction of market failure.
Information Gaps - Governments, like any economic agent, rarely possesses complete information on which to base a decision. In some cases, the information available is positively misleading. It is not surprising that governments may make the wrong policy response to a problem.
Conflicting Objectives - Governments often face conflicting objectives, eg wanting to cut taxes but increase spending on defence.
Politicians maximising their own welfare - Public choice theory suggests that politicians act in a way that maximises their utility whether or not this leads to improved welfare for the citizens they are supposed to represent.
