1.4.2 Government Failure

Question 1

Government failure

Answer 1

Exists when the government intervenes to correct a market failure, but the result is a more inefficient allocation of resources and there is net welfare loss

Question 2

Consequences of government failure

Answer 2

• distortion of price signals
• unintended consequences
• excessive administrative costs
• information gaps

Question 3

Causes of government failure

Answer 3

• Lack of incentives
• Poor information
• Moral hazards

Question 4

Causes of government failure (lack of incentives)

Answer 4

• E.g in the Public sector, there is limited or no profit motive = lack of incentive to improve services or cut costs = inefficiency
• E.g public sector may be prone to over-staffing but govt may be reluctant to make ppl redundant due to political costs of unemployment

Question 5

Causes of government failure (poor information/political interference)

Answer 5

• Politicians may have poor information about the type of service to provide.
• They are not experts but rather concentrate on their political ideology
• ## Decisions made for short-term political gain rather then sound economics

Question 6

Causes of government failure (moral hazard)

Answer 6

• the govt may offer a guarantee to all bank deposits to protect the financial system = encourage banks to take risks since they know they can be bailed out by the government

Question 7

Examples of government failure in various markets (transport policies)

Answer 7

• Mexico city banned car emissions but it didn’t lead to reduced air pollutants

Question 8

Examples of government failure in various markets (housing policies)

Question 9

Examples of government failure in various markets (taxing tobacco/rubbish)

Answer 9

• Tax on rubbish to overcome market failure to include the external cost of rubbish in the price = illegal dumping on road
• Black markets of tobacco

Question 10

Ways to overcome government failure

Answer 10

• give profit incentives
• competition

Question 11

Ways to overcome government failure (give profit incentives) evaluation

Answer 11

• However, many public services are not subject to the same profit goals
• e.g health or education since the goal is not profit but quality of service. (Merit goods)
• With schools targeting better results, they may do so at the cost of excluding less intelligent pupils or sacrifice other aspects of an all-rounded education to get better results

Question 12

Government failure evaluation

Answer 12

• The issue is not as big as market failure

Question 13

Ways to overcome government failure (give profit incentives/performance targets)

Answer 13

• ## E.g schools given targets to achieve minimum exam standards

Question 14

Ways to overcome government failure (competition)

Answer 14

• Example: in the 1980s, the Conservative govt introduced competitive tendering for many public services = local councils lost their monopoly provision of public services e.g school meals.
• If a private company offered a better service = lose out to the private sector.
• Competition = incentives for public sector to act like a private company and cut costs

Question 15

Ways to overcome government failure (competition) evaluation

Answer 15

• cheapest service is not the best.
• A private company may offer to provide school meals for a cheap cost = expense of reducing the quality of food = you reduce costs, but you have a decline in standards.
• A government body then needs to be responsible for checking standards of service.

Question 16

Ways to overcome government failure (competition) evaluation example

Answer 16

• In the 1980s, public bus companies lost their legal monopoly and competition was introduced, with private companies such as Stagecoach entering the market.
• However, this means that there is often an duplication of bus services = increased congestion.
• Also, with private companies, fare increases lead to higher profit for private companies, rather than benefiting the local council.

Question 17

Example of government failure

Answer 17

Library, museum, art tallies