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GOVERNMENT FAILURE
when gov intervention in the market leads to net welfare loss and a misallocation of resources
the total social costs arising from the intervention are
greater than the social benefit
GOVERNMENT FAILURE- CAUSES
distortion of price signals
unintended consequences
excessive administration costs
information gaps
DISTORTION OF PRICE SIGNALS
some types of gov intervention change price signals in the market and distort the free market mechanism- as a result, they keep some companies in business when they are inefficient so the resources should be switched to somewhere else (subsidies) or make consumers pay higher prices (taxes)
e.g. subsidies keep farmers in employment when they cannot produce cheaply enough to be competitive- the result is that the gov keeps them in business when they should close down and find an alternative use for their resources
Max and min prices lead to excess demand/supply and make it difficult to allocate resources
price mechanism aims to allocate resources to their best use- by intervening, the gov distort the mechanism and so resources may be allocated inefficiently
UNINTENDED CONSEQUENCES
some interventions cause effects which the gov did not intend to happen- consumers and producers may react to new policies in unexpected ways and so the policy doesn't have the effect it should
e.g. is the introduction of the buffer stock scheme CAP (Common Agricultural Policy) in the EU- was meant to smooth out the price fluctuations but it ended up leading to overproduction in the EU and a fall in agricultural prices in other parts of the world as EU surpluses were disposed of at cheap prices outside of Europe: this was not the intention of the scheme
targets for treating patients on the NHS has led to a reduction in quality of care- not what the gov intended when they introduced the targets
EXCESSIVE ADMINISTRATION COSTS
In many cases, a lot of money that is allocated by the gov is actually used up on basic administration costs- social costs may be higher than social benefits, once administration costs are taken into account
A lot of money given to the NHS etc. is actually spent on organisational administration rather than putting the money into medical care
INFORMATION GAPS
any decisions that the gov makes must be based on some data but the info they have is always going to be limited-e.g. you cannot accurately predict the no. of cancer patients or the no. of cars on the road
Cost and benefit forecasts of investment are often wrong and so the gov invests in a system where the costs are higher than the benefits, so there is welfare loss- impractical, and usually impossible, for the gov to get every piece of info they need
