Government Failure

Question 1

Define Government Failure.

Answer 1

In the economy causes an inefficient allocation of resources and a decline in economic welfare.

Question 2

Where does government failure arise?

Answer 2

• It arises from an attempt to solve market failure but creates a different set of problems.

Question 3

Reasons for Government Failure - Lack of incentives

Answer 3

• In the public sector, there is limited or no profit motive.
• Because workers and managers lack incentives to improve services and cut costs it can lead to inefficiency.

Question 4

Reasons for Government Failure - Poor Information

Answer 4

• Politicians may have poor information about the type of service to provide.
• Politicians may not be experts in their department but concentrate on their political ideology.

Question 5

Reasons for Government Failure - Political Interference

Answer 5

• Decisions made for short-term political gain – rather than sound economics
• e.g. politicians may take the short-term view rather than considering the long-term effects

Question 6

Reasons for Government Failure - No Consistency

Answer 6

• Change of government often leads to change of approach and new political initiatives

Question 7

Reasons for Government Failure - Moral Hazard

Answer 7

• The government may offer a guarantee to all bank deposits to protect the financial system, but this could encourage banks to take risks – because they know they can be bailed out by the government.

Question 8

Reasons for Government Failure - Regulatory Capture

Answer 8

• When government agencies become too friendly with business/groups they are trying to regulate.

Question 9

Examples of Government Failure?

Answer 9

• White Elephant Projects - Concord cost British and French governments £1.1 billion.
• Tax Leads to fly-tipping - Tax on rubbish is a policy to overcome market failure, taxes leads to illegal dumping of rubbish

Question 10

How to overcome government failure?

Answer 10

• Give performance targets/ profit incentives
• Competitive Tendering - where public sector bodies face competition from the private sector for the right to run a public service.
• Consultants to make decisions on how to cut costs
• Giving certain decisions to certain non-political bodies