4.1.8.10 Government failure Flashcards
(10 cards)
What is government failure?
When government intervention worsens resource allocation or creates new inefficiencies.
Results in net welfare loss (e.g., costly policies with minimal benefits).
List 4 causes of government failure.
- Distorted price signals (e.g., farm subsidies propping up inefficient industries).
- Unintended consequences (e.g., rent controls → housing shortages).
- High administrative costs (e.g., complex tax systems).
- Information gaps (e.g., inaccurate cost-benefit analyses).
How do subsidies distort price signals?
Artificially lower production costs → overproduction of goods (e.g., EU Common Agricultural Policy).
Result: Resources misallocated to less productive sectors.
Give an example of unintended consequences from intervention.
Minimum wage: May lead to job losses if set too high (firms automate/cut staff).
Sugar tax: Consumers switch to other unhealthy options (e.g., sugary snacks).
Why are high administrative costs problematic?
Opportunity cost: Funds could be better spent elsewhere (e.g., NHS vs. bureaucracy).
Example: UK tax credit system’s complexity → high enforcement costs.
How do information gaps lead to failure?
Governments lack perfect data → poor policy design (e.g., HS2 cost underestimates).
Example: Housing policies fail due to unpredictable market changes.
How can governments create market distortions?
Price controls: May cause shortages (e.g., Venezuela’s food price caps).
Over-regulation: Stifles innovation (e.g., excessive red tape for startups).
Is government intervention always worse than market failure?
No: Some interventions succeed (e.g., smoking bans improve health).
Yes: If costs outweigh benefits (e.g., inefficient subsidies).
Give a UK example of government failure.
Poll Tax (1990): Poorly designed → public protests + inequitable burden.
How does this link to market failure?
Justifies limited intervention: Even with market failure, government action may not improve welfare.
