What is Government failure?

As we have seen in 1.3.8 the Government has many methods of dealing with market failure. But how successful are these? Sometimes they are very successful other times not as successful !ut sometimes, by intervening they actually make the allocation of resources worse. "his is Government failure. Government failure occurs when the Government intervenes !ut this intervention results in a net welfare loss i.e. the intervention has actually made the situation worse rather than !etter. "he allocation of resources has !ecome more inefficient.

1.3.9 What is Government failure?

Why does it happen?

1. nade!uate information " if the Government doesn#t have $erfect information a!out the market that they are intervening with or do not realise all of the costs and !enefits of their actions then their decision could actually worsen the allocation.

%. #onflicting ob$ectives " the Government may take action that is $olitically $o$ular !ut economically inefficient. &ith elections !eing fairly tight in recent years Governments do not want to make decisions that are un$o$ular. 'nvesting money into an inefficient !usiness may gain votes !ut is $ro!a!ly not the correct economic decision. Should all economic decisions !e made !y inde$endent !odies therefore? 3. %dministrative costs " (oming u$ with a $olicy and im$lementing it takes u$ time and money this has to !e raised from somewhere else. &hat is the o$$ortunity cost of intervening? ). &arket distortion " making certain decisions may give false im$ressions a!out certain other markets. *u!lic choice theory how Governments make decisions a key element of this is voters. +oters do not want high ta,es. *oliticians want to ma,imise voters hence to kee$ voters they might make economically incorrect decisions

+roblems of government intervention

1. &istiming By the time the Government has intervened the market may have reacted and the situation might !e different all economic decisions have a time lag. %. #osts, costs of running !uffer stock schemes are usually high. 3. -ifficulty !uantifying problems " 5ow can you $ut a value on the e,tent of different damages in markets? ). nformation " 6.g. having a lack of information on the e,tent of a $ro!lem. (ollecting information is costly and time7consuming.

'a(ation and regulation " Government failures?

1. 'a(es are inherently inflationary they cause cost $ush inflation %. 'a(es increase firm)s costs " this damages the international com$etitiveness of -. firms that are highly ta,ed 3. 'a(es will discourage foreign direct investment *. 'he cost of enforcing ta(es is usually high /. mpact on income distribution " regressive ta,es actually damage income distri!ution 0. +roblems deciding on the correct level of ta( , how do you $ut a money value on e,ternal costs? 1. What is the right level of regulation? &ill too much regulation 1ust lead to $ointless !ureaucracy and inefficiency?

'he minimum wage

"he government introduced a minimum wage to ensure that all workers were $aid a fair amount $er hour. "he minimum wage was a price floor on the la!our market which meant more were willing to su$$ly la!our than the firms demanded it hence many works went unem$loyed. "he advantages include2 hel$s those on lower $aid rates gives more incentive to work and it may actually increase demand for goods and services hence increasing em$loyment. "he disadvantages include2 the unem$loyment caused those workers $aid higher than the 34& demanded higher wages. "he amount of unem$loyment is de$endent on the elasticity of the la!our market and how high it is set at. "he result on aggregate was $ro!a!le a more inefficient market outcome hence could !e descri!ed as a government failure.

&e(ico #ity car emissions

"o reduce car $ollution 4e,ico only allowed cars into the city with an odd num!er $late on some days and an even on others. "he result was that $eo$le !ought two older more $olluting cars with different num!er $lates hence (8% emissions grew a clear government failure.