1.4.2: Government Failure Flashcards
What is government failure?
When intervention in the market leads to net welfare loss (and a misallocation of resources).
What are four types of government failure?
-Distortion of price signals.
-Unintended consequences.
-Excessive administrative costs.
-Information gaps.
What is distortion of price signals?
When the government distorts the free market mechanism by artificially altering these forces (using taxes & subsidies).
What are unintended consequences?
When a policy causes effects that the government didn’t intend on.
What are excessive administration costs?
When large proportions of subsidies are used up on basic administration costs.
What are information gaps?
Decisions that the government makes with limited information.
What is an example of distortion of price signals?
Subsidies keep farmers in jobs when they’re inefficient.
What is an example of unintended consequences?
Targets for treating NHS patients leads to a reduction of quality of care.
What is an example of excessive administration costs?
A lot of money given to the NHS spent on organisational administration.
What is an example of information gaps?
Lack of ability to track the amount of cars in the A1.
