government failure table Flashcards
Political self-interest amongst politicians and civil servants
Decisions about where to build new roads, by-passes, schools and hospitals may be decided with the political consequences in mind. e.g. boosting welfare spending in the run up to an election - not using cost-benefit analysis.
Policy myopia
politicians have a tendency to look for short term solutions or “quick fixes” to difficult economic problems rather than making considered analysis of long term considerations. For example, a decision to build more roads and by-passes might simply add to the problems of traffic congestion in the long run encouraging an increase in the total number of cars on the roads.
Regulatory Capture
For example, to what extent has the system of agricultural support known as the Common Agricultural Policy operated too much in the interests of farmers and against the interest of consumers
Disincentive effects
Free market economists who fear government failure at every turn argue that attempts to reduce income and wealth inequalities can worsen incentives and productivity. They would argue against the National Minimum Wage because they believe that it artificially raises wages above their true free-market level and can lead to real-wage unemployment.
Government intervention and evasion
A decision by the government to raise taxes on de-merit goods such as cigarettes might lead to an increase in attempted tax evasion, smuggling and the development of grey markets where trade takes place between consumers and suppliers without paying tax. A decision to legalize and then tax some drugs might lead to a rapid expansion of the supply of drugs and a substantial loss of social welfare arising from over consumption
Policy decisions based on imperfect information
How does the government establish what citizens want it to do in their name? Can the government ever really know the true revealed preferences of so many people? Often a government will choose to go ahead with a project or policy without having the full amount of information required for a proper cost-benefit analysis. The result can be misguided policies and damaging long-term consequences.
The Law of Unintended Consequences
Actions of the government always have effects that are unanticipated or “unintended.” The law of unintended consequences is often used to criticise the effects of government legislation, taxation and regulation. People find ways to circumvent laws; shadow markets develop to undermine an official policy; people act in unexpected ways because of ignorance and / or error.
Costs of administration and enforcement
Government intervention can prove costly to administer and enforce. The estimated social benefits of a particular policy might be largely swamped by the administrative costs of introducing it.
