Government failure Flashcards
What is meant by ‘government failure’?
Costs of an intervention outweigh the benefit of intervention leading to worsening of allocation of scarce resources harming social welfare.
What are the 4 types of government failure?
Information failure
Regulatory capture
Unintended consequences
Admin and enforcement costs very high
Give an example of government failure in
agriculture/dairy industry policies
Minimum price caused the supply to be greater than demand. The EU had to buy the surplus.
As farmers had a guaranteed minimum price, it created an incentive for them to produce as much as possible. It was guaranteed the government would buy any surplus.
What did the minimum prices of food result in
The EU experienced retaliatory tariffs from other countries in response to high agricultural tariffs on food.
At its peak, the CAP took 70% of the EU budget – money that could have been better spent elsewhere.
Farmers started using more artificial fertilisers to maximise yields.
The EU had to keep buying more surplus food, which was stored in big depositories
The food was either destroyed or dumped on world markets (causing lower income for farmers in developing economies)
Give an example of government failure in
transport policies
Driving a car into a city causes congestion and pollution.
Therefore, we get a social inefficient allocation of resources – congestion and time wasted.
Could raise taxes and build a new highway, which travels into the city. In theory, this should reduce congestion
Unintended consequences.
As a result of building the new highway, it may encourage more people to buy a car and live further out of the city.
Increasing supply has an effect on increasing demand in the long-term.
After a few years, the levels of congestion can end up being as bad as before the government spent all the money on building the new road.
In addition to the failure to solve congestion,
the government have increased levels of pollution and wasted public funds on a scheme that has failed to tackle the problem.
Give an example of government failure in
housing policies
lack of new houses being built
the inflated price of those which are offered for sale, in turn, increases the demand for rental properties, with rents rising in response to this
Equity Loan scheme. This provides a loan for up to 20% of the house value (or inside London, up to 40%) to buy new build properties.
Housing supply is extremely unresponsive, so when the government stimulates housing demand, this only makes existing houses even dearer eg restrictions on supplying on Green Belts
While Help to Buy did increase construction in more remote areas where it is easier to build, these were not the places abundant in good jobs.
The ultimate outcome is that young would-be buyers are even more ‘priced out’ in areas with productive jobs, and workers have to commute ever longer distances from remote areas
Give an example of government failure in
recreational drug policies
Policy to eradicate recreational drugs globally in 2008.
leading to the creation of an enormous illegal market increasing violent gangsters.
So we have all of this crime and violence around the world, which is fuelled by the illegal drug trade.
Not preventing the availability of access to drugs.
What is regulatory capture
industries under the control of a regulatory body such as a government agency operate in the interest of producers rather can consumers.
How can direct taxes on demerit goods lead to government failure
where demand is inelastic,
may simply mean that more income is allocated spent on harmful goods, and hence less income is available for spending on beneficial goods.
How can subsidies cause government failure
- Firms more inefficient and reliant
-Encourage the wasteful misuse or over-use of scarce resources.
eg free healthcare can result in doctors’ waiting rooms becoming become full with the so-called ‘worried well’.
This can result in a waste of public resources and a denial of access to these services by those in genuine need.
How can taxation lead to government failure
by encouraging people to either avoid taxes ( the attempt to find
loopholes in the tax system) or evade taxes (which is illegal) through criminal activity such as the use of black markets.
