1.4.2 - Government Failure Flashcards
(7 cards)
What Is Government Failure?
(2 Points)
~ When the costs of government intervention in a market, outweigh the benefits of the intervention.
~ The end result is a worsening of the allocation of scarce resources, harming social welfare.
What Are The Causes Of Government Failure?
(5 Points)
~ Information failure.
~ Excessive administrative costs.
~ Unintended consequences.
~ Distortion of price signals.
~ Regulatory capture.
Describe ‘Information Failure’ As A Cause Of Government Failure
(3 Points)
~ Governments do not have perfect information.
~ They are often subject to political pressure.
~ Leads to prices, where costs are higher than benefits to society.
Describe ‘Excessive Administrative Cost’ As A Source Of Government Failure
Costs of policy / intervention may be high.
Describe ‘Unintended Consequences’ As A Source Of Government Failure
(2 Points)
~ Some policies / intervention can cause effects the government didn’t intend to happen.
~ Creation of illegal markets, impacts on the poor, impacts on firms and employment issues.
Describe ‘Regulatory Capture’ As A Source Of Government Failure
(2 Points)
~ Interests of society are overlooked, for the interest of CEOs, managers and firms.
~ Occurs when they influence the regulation E.g. Maybe they used to be friends.
Describe ‘Distortion Of Price Signals’ As A Source Of Government Failure
(2 Points)
~ Changing price signals in the market and distorting the free market mechanism.
~ Results in an inefficient allocation of resources.