3.1.5.9 GOVERNMENT FAILURE

Do real world market fail?

Yes

What type of markets fail?

Product, labor and financial marks

What is the main risk that comes with government intervention?

Government failure

What is government failure?

Government failure happens when government intervention in the economy (intended to correct a market failure) actually leads to an inefficient allocation of resources, or a net welfare loss of society

What can cause government failure?

• information gaps

• unintended consequences

• political interferences ans incentives

• bureaucratic inefficiency

• regulatory capture

• moral hazard

What does "bureaucratic inefficiency" mean?

When public sector operations lack the traditional profit motive that drive efficiency, often leasing to systematic bloat

What does "regulatory capture" mean?

Regulatory agencies often become too closely aligned with the businesses they oversee, resulting in favoritism

What does "moral hazard" mean.

Government safety nets, can encourage private entities to take excessive risks

Give 6 examples of government failure?

1. Policy leads to greater inequality

2. Regulatory capture

3. Failure to rigorously rest a policy

4. High enforcement costs

5. Unintended consequences

6. Conflicts with other policy aims

Explain "regulatory capture"?

Occurs when a governing agency, created to act in the public interest, instead advances commercial or political concerns of special interest groups that dominate the industry

Explain "failure to rigorously test a policy"?

This relates to information failure, where the government lacks accurate data on the costs and benefits of

Explain "high enforcements costs"?

The administrative and policing costs of a policy outweigh the actual benefits gained

What are 8 causes of government failure?

1. Political self interest

2. Pontifical myopia search for “quick fixes”

3. Regulatory capture

4. Information failures

5. Disincentive effects

6. High enforcement/compliance costs

7. Conflicting policy objectives

8. Damaging effects of red tape

Explain "political self interest" as a cause of government failure?

When policymakers prioritize personal power, re-election, or special interest perks over the broader welfare of the public

Explain "policy myopia" as a cause of government failure?

Policy myopia occurs when governments prioritize short term political or economic fixes over long term solutions

Explain "regulatory capture" as a cause of government failure?

Where a regulatory agency advances the commercial or political concerns of special interest groups

Explain "information failures" as a cause of government failure?

When a government intervenes, but make decisions based on inaccurate, inaccurate, incomplete or miss understood data

Explain "disincentive effects" as a cause of government failure?

When a government interventions unintentionally discourage individuals/businesses from working or investing

Explain "high enforcement/compliance costs" as a cause of government failure?

When the monstrance expenses of implementing, monitoring and obeying the policy exceeds the social benefits that the policy was meant to generate

Explain "conflicting policy objectives" as a cause of government failure?

When the government pursues two or more goals that undermine or contradict each other

Explain "damaging effects of red tape" as a cause of government failure?

When excessive regulations create compliance costs and delays that outweigh the beliefs

When can government failure also occur?

When a policy is ineffective in achieving a stated aim

What is the law of unintended consequences?

The law of unintended consequences is when an action or government policy has unexpected effects that were not planned, and these effects can be positive or negative

Why is there unintended consequences?

Because complex systems are highly interconnected, attempting to control one variable often creates a ripple effect of unexpected, undesirable side effects

What is regulatory capture?

A form of government failure where a regulatory agency created to act in the public interest, instead advances the commercial or political concerns of the specific interest groups its supposed to oversee

Give possible government failure for the following interventions/policies

Summary of some causes of government failure

How did the UK protect the steel industry post Brexit?

A quota on import of certain steel products and a 25% tariff on imports above the quota

Give me two examples of possible government failure from imposing quotas, and tariffs on imported steel into the UK?

1. Tariffs and quotas lead to higher cost for downstream users of steel

2. Risk of a tit-for-tat trade war with other countries imposing retaliatory trade barriers

What is the Scottish rent freeze?

Scottish government introduced a rent increased cap in rented housing and a pause on some evictions in 2022, the rent cap increase was set at 0% effectively freezing rent, the measures were intended to protect tenants during the cost of living crisis

Give me two examples of possible government failure from imposing rent controls in Scotland?

1. Possible exit of landlords from the market due to subnormal profits

2. Fall in the quality of the sock of rented housing as landlord find way to cut costs

In what way is the per capita consumption of energy drinks in the UK, an example of government failure?

Negative externalities (overconsumption - creating external cost on NHS)

Information failure (consumers may not fully understand the long-term health risks)

Market dominance (Red Bull and Monsters high brand awareness suggest a degree of monopoly power)

Which age group are the biggest consumers of high caffeine energy drinks in Europe?

Young people

Give me two examples of possible government failure from banning high caffeine drinks to people under the age of 16?

1. Black market and illegal sales

2. Enforcement costs

Give me two possible causes of government failure from imposing a minimum retail price for high caffeinated drinks?

1. Low PED and low effectiveness

2. Substitution effects

How can you link government failure to education?

The government may not know what the socially optimum level of education is, some people argued at free state education leads to over provision and can create market distortions rather than remove them

What is a price ceiling?

This artificially limits the maximum price businesses can charge for a good or service

How could a price ceiling be a disincentive for business?

When the maximum is set below the natural market equilibrium it triggers several negative consequences for producers, reduce profit margins, lower supply, quality cuts, less innovation

What type of market may price floor create?

Black market

Match the government failure with the correct explanation

What is the best example of government failure?

Prohibition in the USA in the 1920s

What did this prohibition lead to?

The Wall Street Crash and the Great Depression

If the national minimum wage increased, what would happen to the equilibrium price and the quantity demanded for the restaurant market?

Equilibrium price would increase

Quantity demanded would decrease

Explain why arise in the national minimum wage would have unintended consequences for the employees of restaurants?

• job losses (they may reduce staff)

• reduced hours (cut back shifts)

• increased workload

• reduced non