4.1.8.9 Government failure

When does govt failure occur?

When does govt failure occur?

• occurs when government intervention in markets leads to a less efficient allocation of resources

• The government create market distortions leading to allocative inefficiency.

• economic welfare is reduced

What is the law of unintended consequences?

• unexpected events may occur due to government intervention.

  This can happen for a variety of reasons:

   Inadequate information

   Conflicting objectives

   Administrative costs

What does the Provision of information do?

• ensures economic units can maximise decisions when consuming and producing goods and services

• government will provide information where the private sector fails to do so.

What areas does the govt provide information in?

• The job market

• Dangerous products e.g. cigarettes

• Economic data to help firms plan for the future

Information by the gov can be inaccurate, what does this do?

• information used by government can be inaccurate due to poor research or an inability to predict the future

• delivers the wrong signals to markets meaning decision-making is flawed

What do Conflicting objectives mean?

• those people who have been appointed to represent the public interest might exploit their positions to represent their own interests, this is called the Public choice theory.

• Politics leads to compromises being made between different parties

• trade-offs mean most efficient & effective policy decisions are not being made

• p conflict of interest leads to ‘second-best’ decisions being made

What are Administrative costs?

• expenditures that the government spends on intervening in markets.

• Administrative costs can mean that the benefits derived from government intervention are outweighed by the costs

• This can occur as government bureaucracy leads to higher costs

• Budgets are constrained, particularly in times of recession

• Decisions have to be made on where to spend money

• Often, incorrect decisions are made where the costs do not achieve the expected benefits

What do the govt do in order to influence behaviour of both individuals and firms?

• government try to create incentives and disincentives in order to influence behaviour of both individuals and firms

• This in turn, helps to create markets that would not survive in their present situation without government support

• distorts the free working of the market

• can lead to the government creating inefficiencies rather than correcting them