Government Failure Flashcards
(12 cards)
What is market failure?
This is when an individual market without intervention does not deliver the optimum level of production and consumption and a misallocation of resources occurs.
7 Market Failures
Public goods
Externalities
Merit/demerit goods
Factor immobility
Poverty and inequality
Lack of competition/monopoly
Information failure
What is government intervention?
When the government gets directly involved in an individual market with policies designed to reduce or prevent the market failure.
Government intervention methods
Direct provision
Taxation on a product
Subsides of a product
Max/Min price
Legislation
Taxation
Regulation
Nationalisation/Privatisation
Buffer stock schemes
What is government failure?
Occurs when intervention is not only ineffective but may deepen the existing market failure or cause new problems/market failures. When intervention results in an net loss of welfare.
What is political self interest?
MPs and the government care about their popularity and their chances of getting re-elected. This results in the government often not making unpopular but necessary decisions when their popularity is weak or they are in the run up to an election.
What is policy myopia?
This is when a short term solution is implemented when a long-term solution is needed. This is linked to political self-interest. This is often because long-term solutions may be more expensive or the benefits will not be seen for may years.
What is the law of unintended consequences?
When government intervention results in an unexpected negative effect on something else.
What issues are there with regulation?
Regulatory bodies are often expensive to setup and lack sufficient budgets to investigate malpractice and so the threat is not enough. Possible corruption can occur between businesses and regulators. Regulatory capture can also occur where large businesses develop relationships with regulators which can result in regulators siding with businesses more often unconsciously rather than protecting consumer interests.
Cost of administration and enforcement?
If government intervention ins expensive to implement then the costs of intervention may outweigh the benefits.
Decisions based on imperfect information?
The government makes a lot of decisions about areas where they lack sufficient, up-to-date and accurate information or they misunderstand the information, resulting in them making a bad decision which wastes scarce resources.
Disincentive effects of government intervention?
The tax and welfare system creates disincentives for people to work and can cause benefit dependency and the poverty trap., and when benefits are too high then there is less of an incentive to work in minimum wage employment. Taxing higher earners too much can also result in a brain drain which loses all the tax revenue and their skills.
