Government Failure Flashcards
When does government failure occur?
Occurs when government intervention-> inefficient allocation of resources & … net welfare loss
What is the severity of government failure in comparison to market failure?
Note- government failure ⬇️ serious than market failure (aims to solve)
How many types of government failure are there?
4
What are the types of government failure?
1) Distortion of price signals
2) Unintended consequences
3) Excessive administration costs
4) Government information gaps
What is the distortion of price signals?
Distortion of price signals: price mechanism distorted & … resources misallocated
How might the distortion of price signals occur?
- Max price controls-> excess demand/shortages (⬇️ price)-> ⬇️ quality & quantity
- Min price controls-> excess supply/surplus (⬆️ price)-> waste or opportunity cost for government guaranteed price scheme
How may unintended consequences occur?
- Indirect taxes- illegal markets- smuggling- crime-> ⬇️ tax revenue
- Subsidies- dependence on 💰-> inefficient production
- Max price- shortages of 🚘/🧹 e.g. specialist workers with ⬇️ income
- Min price- surpluses of 🚘/🧹 e.g. min wage-> unemployment- labour expensive
- Pollution permits- firms ✖️ invest in renewable energy sources- permits cheaper
- Regulations- regulator acts in interest of firm instead of consumer
What are excessive administration costs?
Costs from formulation, monitoring & enforcing of government intervention
How may excessive administration costs occur?
- Tax administration & collection
- Calculating & monitoring welfare benefits- ensure claimants receive right payments
- Constant monitoring of regulations
What are government information gaps?
Government information gaps: government lacks knowledge to make rational decision
How may government information gaps lead to negative consequences in real life?
- ⬆️ tax for top income earners-> ⬇️ tax revenue due to ⬆️ tax evasion
- Allocation of 🐠 catches per 🚣♀ set too ⬆️-> further depletion of 🐠
