Economics Mr Banks

• Definition of Government failure: When the government intervenes in the market and it causes a net welfare loss due to unintended consequences
• Why do governments fail:

  1. 'Red Tape' new regulation can be difficult to follow, causing firms to become inefficient, having higher costs and passing those costs onto consumers
  2. Time lags, a new possible may time time to become effective and in the short run there is not enough evidence to show its effect, so it can be scrapped
  3. Administrative costs, policies take time to enforce and continue to be enforced, which costs money
  4. Information failure, the government acts on incorrect data
• Common agricultural cap- Government failure exampl


  Aimed to correct the market failure caused by volatile prices within EU agriculture markets, by guaranteeing farmers an minimum income levels
• Government failure caused by Common agricultural Cap?

  Farmers are guaranteed a minimum price for their produce. Any excess supply is bought by the government. This reduces the risk for farmers and encourages overproduction (a moral hazard problem) and is costly.

  It can mean increased food prices for households – the government guarantees farmers a minimum price. The cost to households may be greater than the benefit to farmers
• Example of Government failure


  maximum rent prices:  To correct market failure caused by excessive rental prices in the housing market. The aim is to bring rent prices down to a more affordable level.
• Government failure caused by maximum rent price

  Maximum rent prices is bad for landlords. Less houses will be made available for rent, causing excess demand for rental houses.

  It can cause a black market to develop. Many landlords will rent their houses out “off the books” and deal in cash only. This means consumer protection is at greater risk, and the government does not receive any tax revenues as a result

  It can affect employment levels in certain areas. A shortage of housing means a shortage of workers too.
• Example of government failure:

  subsidisation of public transport:  To correct market failure caused by the excessive number of drivers on the road, causing congestion and contributing to global warming. The aim is to make public transport more affordable for consumers.
• Government failure caused by subsidisation of public transport

  Public transport is an inferior good. The more you earn, the less you want to use public transport. Subsidising public transport may not increase consumption by much at all

  It’s costly, so taxpayer money is being used to pay for subsidies, even though people still may choose to drive

  Public transport is still inconvenient for many people. In rural areas especially, public transport is too time consuming for most people. However, in populated areas, like the City of London, public transport is much more successf
• Example of government failure:

  fishing quotas:  To correct market failure caused by the excessive fishing which depletes this valuable resource.
• Government failure caused by fishing quotas


  Fish stocks continue to be depleted. This suggests the policy is not doing what is meant to do

  It can be difficult for fishermen to manage. Sometimes fishermen accidentally overfish. These fish are then thrown back into the ocean, even though they’re dead. These fish are known as “discards” and it is seen as extremely wasteful

  The monitoring and policing is expensive and difficult to control. “It is estimated that, each year 970 – 2,700 billion fishes are caught from the wild”
• Internal Economies of scale:

  Technical, Purchasing, Marketing, Risk, Financial
• Technical Economies of Scale:

  the efficiency gains when a firm increases the scale of its operation yields lower costs per unit. For example, buying a bigger factory will cost you a little bit more but could give you a lot more volume to store your stock. Therefore, the cost per unit starts to fall. This is why big companies like Amazon opt for having huge central warehouses where all of the operations take place, rather than many small warehouses, each with high running costs.
• Specialisation and Division of Labour:

  a labour force that is specialised, divided and highly skilled from repeating a task will be more productive than a labour force that is the complete opposite. When your labour force can produce more for you in a given amount of time, then your cost per units fall