1.4.2 Government Failure ✅

Question 1

What is government failure?

Answer 1

Intervention that leads to more inefficient allocation thus further welfare loss.

Question 2

What are the different causes of gov failure?

Answer 2

• Distortion of price signals.
• Unintended consequences.
• Excessive admin costs.
• Information gaps

Question 3

What is a disortion of price signals?

Answer 3

Signalling function of price mechanism is articfically altered (price max/min or subsidies).
Eg.
- subsidies support firm that without would close.
- max/min prices cause excess demand or supply.

Due to price not reflecting true supply and demand it can lead to over or under production.
Eg rent min prices discourage landlords.

Question 4

What are excessive admin+enforcement costs?

Answer 4

Excessive costs can reduce benefits of policy.
Eg. Controlling subsidies, regulations and price controls.
Eg. Complex healthcare regulation can potentially limit recourses available.

Question 5

What are unintended consequences?

Answer 5

• black markets (consumers and producers maximising their interests and look for loop holes).
• impact on poor. (Cash benefits discourage work).
• impact on firms (and those they employ).
  New problems created.

Question 6

What are information gaps?

Answer 6

Gov decisions are subjective and can be effected by:
- info gaps (incorrect valuation of externalities).
- bias (political pressures).
Leading to policies that do not correctly address market failure.
Eg. Regulators lack accurate pollution data therfore can’t target biggest contributors.

Question 7

What is an example of gov failure?

Answer 7

• illegal markets (2019 illegal trade was worth 10b pounds).
• uk energy market (regulatory fail) ofgem set a max price which was raised in 2022 and negatively effected pensioners (unable to afford + have to ride buses to keep warm).

Question 8

Example of market failure in the agricultural market?

Answer 8

Gov can intervene in the agricultural market with price support but this can lead to over production and waste. (Inefficient resource allocation).
Example = European Union agriculture policy has been criticised for excess production leading to “butter mountains”.

Question 9

Example of gov failure in rent controls?

Answer 9

Rent control policies are designed to make housing affordable but can lead to shortages + lower conditions + less investment.

Example = Occurred in San Francisco.