What is government failure seen as
intervention that results in a net welfare loss
Define government failure
when government intervention designed to correct a market failure results in a less efficient allocation of resources
State 4 potential causes of government failure
o distortion of price signals
o unintended consequences (Aka cobra effect)
o excessive administrative costs
o information gaps
What are unintended consequences and give an exmaple where they would occur
A cause of government failure whereby the government’s actions result in unexpected effects.
example: prohibition, high taxes on cigarettes
Define net welfare loss
An overall loss of economic welfare when compared to the starting position
Define regulatory capture
A form of government failure, happens when a government agency operates in favour of producers rather than consumers.
Explain how distortion of rpice signals occur
- some types of government intervention change price signals in the market and distort the free market mechanism.
- As a result, they keep some companies in business
when they are inefficient so the resources should be switched to somewhere else (subsidies) or make consumers pay too much for a good (taxes)
How does distortion of price signals lead to gov failure
- The price mechanism aims to allocate resources to their best use and where consumers want and value them most highly.
- By intervening, the government distorts
the mechanism and so resources may be allocated inefficiently
Examples of distortion of price signals
- subsidies (CAP) keep farmers in employment when they cannot produce cheaply enough to be competitive.
+ The result is that the government keeps them in
business when they should close down and find an alternative use for their resources.
+ ALSO, greate consumption fo goods wiht externla costs like sugar - Maximum and minimum prices lead to excess demand/supply and make it difficult to
allocate resources
Describe excessive administrative costs
-a lot of money that is allocated by the government is actually used up on basic administration costs.
- The social costs may be higher than social benefits,
once administration costs are taken into account.
- adminstartive costs of gov iny > benefits that it produces
Describe information gaps
- A lack of sufficient information can lead to government intervention being set in an ineffective manner.
- impossible for the governemnt to obtain full information needed to get accurate balance of costs and benefits
Examples: the promotion of diesel cars by European governments.
