Cards (29)

  • What is government failure?
    Occurs when the government intervenes to correct market failure but ends up causing a net loss of economic welfare.
    In other words, the costs of intervention are greater than the benefits provided by it.
  • What are some examples of government failure?
    • lack of information
    • unintended consequences
    • externalities
    • monopolies
    • etc
  • What is meant by monopoly power?

    When a firm controls the market, e.g. some experiencing poverty and homelessness.
  • What is meant by inequality?

    Unfair distribution of resources in free market, e.g. some experiencing poverty and homelessness.
  • What is meant by factor immobility?
    e.g. geographical/occupational immobility. For example, when there are pockets of high unemployment, but it is difficult for the unemployed to move and get a job.
  • What does government failure lead to?
    • Government failure occurs when government intervention in markets or economic activities leads to an outcome that reduces overall economic welfare.
    • It is the opposite of the intended improvement or correction of market failures.
  • What is meant by net welfare loss?
    the lost welfare as a result of too much or too little production and consumption of a good or resource.
  • What can government failure result from?
    • Government failure can result from poorly designed or implemented policies, misaligned incentives, or unintended consequences.
  • What can government failure lead to?
    It may lead to inefficient resource allocation, reduced consumer and producer surplus, and overall economic losses.
  • What are the 4 causes of government failure?
    • distortion of price signals
    • unintended consequences
    • excessive administrative costs
    • information gaps
  • What are some details on distortion of price signals?
    • Government interventions, such as price controls or subsidies, can distort price signals markets.
    • Distorted prices may not reflect true supply and demand conditions, leading to overproduction or underproduction of goods and miss allocation of resources
  • What is an example of distortion of price signals?
    Rent controls may create housing shortages because they set rents below market equilibrium, discouraging landlords form building or maintaining rental properties.
  • What are some details about unintended consequences, leading to market failure?
    • Policies aimed at addressing one problem may inadvertently create new problems or unintended consequences.
    • these unintended consequences can result from imperfect understanding of complex markets and behavioural responses.
  • Wha is an example of unintended consequences, leading to government failure?
    Cash transfer programmes aimed at poverty reduction might discourage work among some recipients, leading to decreased labour force participation.
  • What are some details on excessive administrative costs?
    • Government interventions often involve administrative costs related to implementation, monitoring, and enforcement.
    • Excessive administrative costs can reduce the net benefit of a policy.
  • What is an example of excessive administrative costs, leading to government failure?
    Complex regulations in the healthcare industry can lead to high administrative costs for both providers and government agencies, potentially limiting the resources available for patient care.
  • What is some details about information gaps, leading to government failure?
    • Government interventions may be based on incomplete or inaccurate information about market conditions pr the behaviour of economic agents.
    • This can lead to policies that do not effectively address market failures or achieve their intended goals.
  • What is an example of information gaps?
    If regulations lack accurate data on pollution sources, environmental policies may fail to target the most significant pollution contributors effectively.
  • What are the government failures in various markets?
    • agricultural price supports
    • subsidies in renewable energy
    • rent controls
  • What is some detail on agricultural price supports, regarding government failure?
    • Government interventions in agriculture, such as price supports, can lead to overproduction of certain crops, surplus stockpiles, and waste.
    • These policies can result in government expenditures and inefficient resource allocation.
  • What is an example of agricultural price supports, regarding government failure?
    The European Union‘s Common Agricultural policy (CAP) has faced criticism for its support of excess production, leading to “butter mountains“ and “wine lakes”.
  • What are some details about subsidies in renewable energy, regarding government failure?
    • While subsidies for renewable energy sim to reduce environmental harm, they can lead to inefficient resource allocation if not carefully managed.
    • Over-subsidisation can create market distortions and waste taxpayer funds.
  • What is an example of subsidies in renewable energy, regarding government failure?
    Spain’s generous solar energy subsidies led to an unsustainable boom in solar installations, which, when reduced, resulted in financial losses for investors.
  • What are some details about rent controls, regarding government failure?
    • Rent control policies, designed to make housing affordable, can lead to housing shortages, deteriorating building conditions, and reduced investment in rental housing.
  • What is an example of rent controls, regarding government failure?
    In San Francisco, rent control policies have contributed to housing shortages, and soaring housing costs for non-controlled properties.
  • Why is understanding government failure and its causes important?
    Understanding government failure and its causes is essential for policymakers to design effective interventions that maximise welfare and minimise unintended consequences.
    Recognising the potential pitfalls of government intervention is crucial for efficient and equitable economic management.
  • What is meant by monopoly power?
    When a firm controls the market.
  • What is meant by inequality?
    Unfair distribution of resources in free market, e.g. some experiencing poverty and homelessness.
  • What is meant by factor immobility?
    E.g. geographical/occupational immobility. For example, when there are pockets of high unemployment, but it is difficult for the employed to move and get a job.