The Dangerous Dogs Act 1991 was meant to reduce the damage and danger to society from the increased ownership of dangerous dogs such as Pit Bull Terriers. What have been the subsequent effects of this legislation? http://en.wikipedia.org/wiki/Dangerous_Dogs_Act_1991

Government Failure Government intervention in markets leads to economic inefficiency and net welfare loss This arises when the total social costs arising from intervention are greater than the total social benefits that are created from that intervention.

Unintended consequences Smoking ban leads to an increase in demand for patio heaters?

Evaluate the likely impact on congestion in Shanghai if a daily congestion charge for the business district is introduced. It is difficult for freight or commercial goods vehicles to use public transport so they could get hit heavily, which could cause business costs to rise and lead to higher prices Cost of administration and enforcement could be too high compared to the revenue generated – this is the case in London for example

Distortion of price signals Often seen in agricultural and labour markets Gov’t may intervene to stabilise agricultural prices and farm incomes (eg. CAP) Price Quantity of Wheat Min Price Mkt Price S D Excess supply Qd Qs This allows farmers to remain profitable and stay in business. However it means that domestic consumers have to pay higher prices for the product.

CAP (in a nutshell!) ½ of European Commission budget spent on CAP – support for farmers to keep them in business Subsidies & min. prices cause food surpluses which have to be dealt with Selling them into foreign markets cheaply disrupts agricultural systems in other countries Destroying them represents a waste of resources Many countries object to CAP and it is criticised by the WTO

Distortion of price signals If the losses to consumers are greater than the gains to farmers, then there is government failure. Examples in the labour market…. What are the issues with raising the minimum wage? What about raising unemployment benefits?

Distorting Mkt Forces – Min Wage Aim to reduce poverty among lowest paid Trade-off means increased unemployment Wage Quantity of Labour Min Wage Free Mkt Wage S labour D labour Unemployment Qd Qs

Distortion of Mkt Forces – Income Tax If tax is set too high, what could be the effect?

Distortion of Mkt Forces – Benefits & Tax Credits Benefit system aimed at helping reduce poverty High benefits may discourage people from seeking work → economy less competitive Schemes are hard / expensive to administer – fraud is common → extra cost to gov’t

Distortion of Mkt Forces – Rent Control Gov’t may put restrictions on rent rises May ↓ availability / quality of rental property Rent S Mkt Rent Max Rent D QS QD Quantity of flats Shortage

Excessive administrative costs The administrative costs of correcting market failure us so large that it outweighs the welfare benefit from the correction of market failure

Information failures Has there been government policy failure over swine flu? In the emergency in 2010, the UK government contracted to buy 120 million jabs from the two manufacturers, Glaxo‐Smith‐Kline and Baxter, but then reduced the order to just 44 million as the emergency petered out. Only 6million of those have actually been used, nearly 4 million are being given to the World Health Organisation for use in Africa, leaving 34 million on the shelf.

Lack of Market Information Difficult for government to put correct “price” on market failure Full / complete information may not be available / possible E.g.. what is the “cost” to a person if they acquire cancer from 2nd hand smoke? …therefore what tax should be charged on cigarettes Likely to result in over or under taxing

Politicians maximising their own welfare Public choice theory suggests that politicians act in a way that maximises their own utility whether or not this leads to improved welfare for the citizens they are supposed to represent.

Investigate how the UK government’s subsidies for bio fuels are an example of government failure. http://news.bbc.co.uk/1/hi/uk/7581436.stm http://www.policyexchange.org.uk/news/news

Research the history of the government’s Individual Learning Account scheme and investigate the extent to which can be seen as an example of government failure. http://news.bbc.co.uk/1/hi/uk http://en.wikipedia.org/wiki/Individual_Learning_Account http://www.dcsf.gov.uk/ila

http://www.bbc.co.uk/news/science-environment-39053678