8.10

• government failure definition

  Occurs when government intervention reduces economic welfare, leading to an allocation of resources that is worse than the free-market outcome (worsens the allocation of resources)
• what are the main causes of government failure?

  • unintended consequences
  • information gaps
  • administrative costs
  • regulatory capture
  • distortion of price signals
  • political self-interest
  • moral hazard
• what is the ‘law of unintended consequences’ in policy?

  when interventions lead to unexpected negative outcomes e.g rent controls causing a shortage of housing or black markets
• how do information gaps cause market failure?

  governments might not fully understand the market, leading to poor decisions e.g setting the wrong tax level or subsidy
• how do high admin costs cause failure?

  if the cost of implementing a policy outweighs the benefits, it may lead to inefficiency - e.g complex regulation that’s costly to monitor
• what is regulatory capture?

  when regulator becomes biased in favour of the firms it’s meant to oversee, acting in their interests, not the publics
• how can price controls lead to government failure?

  interventions like price floors/ceilings can disrupt supply and demand - causing surpluses or shortages and inefficiency
• how can politics cause government failure?

  politicians may make decisions based on votes, not efficiency - e.g avoiding fuel tax increases even if it would reduce pollution
• how can moral hazard cause government failure?

  if people or firms take greater risks because they know the government will bail them out - e.g bank bailouts in the 2008 crisis
• real-world examples of government failure

  • rent controls leading to housing shortages
  • agricultural subsidies creating overproduction
  • fuel duty freezes reducing green incentives
  • plastic bag bans increasing thicker plastic use
• how can we evaluate government failure?

  • was the failure worse than the original market failure?
  • can the intervention be revised or improved?
  • what is the opportunity cost of doing nothing?
• how do market failure and government failure differ?

  • market failure: inefficiency caused by free markets (e.g externalities)
  • government failure: inefficiency caused by intervention that makes things worse