Government Failure (LS23) Flashcards
Government failure
When government intervention designed to correct a market failure results in a less efficient allocation of resources
Causes of government failure
Unintended consequences
Distortion of price signals
Excessive administration costs
Information gaps
Unintended consequences
Result in a worse outcome than before gov intervention was implemented eg high tax on cigarettes
Distortion of price signals
Results in shortages and gluts (subsidies may result in lower prices and greater consumption of goods with external costs) eg sugar farmers
How can regulation aim to correct market failure?
Provides incentive to change behaviour toward the socially optimal level of output
Leads to removal of welfare loss, welfare gain/positive externalities (if it works)
Disadvantages of regulation
Cost (costly because of administration and enforcement)
Setting right level of regulation is hard
Encourages black market activity
Unintended consequences may arise
Excessive administration costs
Admin costs > benefits eg drug prohibition
Information gaps
Can lead to government intervention set in an ineffective manner
Guaranteed minimum pricing scheme
Surplus output created is purchased by gov agency at minimum price to protect producer incomes
Advantages of minimum pricing schemes
Producers incomes increase/stabilise (greater investment and employment)
Greater security of food supply
Surplus can be stockpiled/used as aid
Disadvantages of minimum pricing schemes
Surpluses being sold overseas at low prices can be damaging to farmers in developing countries, struggle to compete.
Opportunity cost of gov finances, may have to raise tax/cut spending in other areas
Difficult to set price at right level (info gap)
Storage + security costs of stockpiles
