Types Of Government Failure Flashcards
What are the 4 types of government failure?
1)positive externalities
2)negative externalities
3)information gaps
4)public goods
How can the government correct market failure?
By implementing:
Subsidies, taxes, tradable pollution permits, minimum and maximum price, regulations and information provisions
What is government failure?
When the government intervention fails
What are the 4 main causes of government failure?
1) distortion of the price mechanism
2)the law of unintended consequences
3)administration costs( such as paying regulators to check that firms do not exceed the amount of pollution they are allowed to emit)
4)information gaps
Where is maximum price on a diagram?
Under equilibrium
How does max price lead to gov failure?
Max price lowers prices but lower prices reduces the incentive to supply, leading to excess demand
Where is minimum price on a diagram?
Above equilibrium
How does min price lead to gov failure?
Min price increases price but higher prices increases incentive to supply more and overproduce as demand will fall since consumers are not willing to pay higher prices, which creates excess supply
What is law if unintended consequences?
It means that any gov intervention will have some unintended consequence( E.g. the government introduced speed bumps to slow vehicles down, but that meant that emergency services such as ambulances would have to slow down at every speed bump and then accelerate again wasting time and making them arrive at the emergency later. This is an unintentional consequence)
How does information gaps cause market failure?
Information gaps forces governments to make difficult decisions without full information about the costs and benefits of their choice, which results in government failure.
