Chpater 10: Government failure

Government failure

When government intervention leads to an ineffecient allocation of resources

Causes of government failure

Policy myopia- government looks for quick fixing

High enforcement costs

When government agency operates in favours of the producers

Information failure

Unintended consequences

Poor value for money

What are some unintended consequences of government policies

People and firms find ways to avoid laws

Illegal markets may develop

Information failure

When people have innacurate or incomplete data

What are causes of information faliure

Product is complex

Unbalanced knowledge

Unaware of long term consequences of consumption

Price information is hard to find

What are two aspects of asymmetric information

Moral hazard

Adverse selection

Moral hazard

When insured consumers are likely to take greater risks because the company will bear the cost

Adverse selection

When those with underlying health risks are more likely to get health insurance. This increases the price of insurance for healthy consumers

What causes car insurance premiums to rise

Increasing number of fraudulent claims

Rising number of claims due to more people owning cars

Why are high insurance prices bad

Use up more disposable income

Rise in number of people driving uninsured

Government intervention to reduce information gaps

Compulsory labelling on harmful products

Campaigns to raise awareness

Performance tables for schools

Consumer protection laws

Industry standards