4.1.8.9 Government failure

When does govt failure occur?

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

• creates 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?

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

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?

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

What do Conflicting objectives mean?

• people who have been appointed to represent public interest might exploit their positions to represent their own interests

• leads to compromises being made between different parties

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

• leads to ‘second-best’ decisions made

What are Administrative costs?

• expenditures that the government spends on intervening in markets.

• benefits derived from government intervention > costs

• Budgets are constrained, particularly in times of recession

• Decisions made on where to spend money

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

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

• creates markets that wouldn’t survive in their situation w/out government support

• distorts free working of the market

• lead to the government creating inefficiencies