What is government failure? Unit content Students should be able to: Define government failure and show how it results in a net welfare loss Define and explain different causes of government failure (distortion of price signals, unintended consequences, excessive administration costs and information gaps) Evaluate government failure in various markets

What is government failure? Microeconomics Topic 5d: Government intervention What is government failure? Government failure is defined as:

Microeconomics Topic 5d: Government intervention What am I describing? The economic welfare that is lost as a result of too much or too little production and consumption of a good or resource. HINT: three words n… w… l… Drawing game…

What are the causes of government failure? distortion of price signals unintended consequences excessive administration costs information gaps regulatory capture political self interest policy myopia conflicting objectives

Distortion of price signals Governments may tax foreign imports of food to protect UK farmers. What are the problems of this? Government may want to reduce income inequality by raising minimum wage. But…

The law of unintended consequences Actions of consumers, producers and the government may have effects that are unanticipated or unintended. People do not always react as we expect E.g. an increase in tax on tobacco may lead to OR the minimum wage may lead to Or increasing income tax rates may act as a

Costs of administration and enforcement Government intervention can be costly to administer and enforce as regulators are needed and legal procedures will need to be in place. Remember…

Information gaps Governments often do not have full information to make decisions (remember __________________________________) and/or may be wrongly advised (see regulatory capture on the next slides).

Government failure: regulatory capture This is when the industries under the control of a regulatory body appear to operate in favour of the vested interests of p__________ rather than c___________ E.g. CAP is often criticised for operating in the interests of __________ working against the interests of:

Government failure: political self interest Politicians may make decisions based on: All of these can lead to a misallocation of resources. Public choice theory suggests that politicians act to maximise their own utility.

Government failure: policy myopia Politicians tend to look for ‘quick fixes’ i.e. short term solutions e.g. building more roads to ease congestion This can distort the proper functioning of markets and lead to inefficiencies in the economy E.g. short term subsidies to coal producers to keep open loss-making coal pits might prove to be a waste of resources if the:

Government failure: conflicting objectives Government objectives can conflict E.g.

Environmental policies example The government introduced a landfill tax in the mid 1990s to reduce waste and encourage households and firms to recycle. But…

Price instability and the CAP Why do governments regard agricultural markets as strategically significant? What was the aim of the CAP? Draw a diagram showing the impact of the CAP on the EU wheat market. Include the free market EU equilibrium price Pe Assume that the world price is below this and label it Pw Finally add Pg, the CAP guaranteed price

What are the undesirable outcomes from agricultural stabilisation policies?

Why might building more roads to relieve congestion lead to government failure?

Why might rent controls lead to government failure?

Why might a minimum wage lead to government failure?