Government Failure

 Government failure is when the government sees a market failure, tries to solve it, but only makes matters worse.

Government Failure…  Government failure occurs when government intervention results in a net welfare loss compared to the free market solution.

 In 1920 the federal government banned the sale and consumption of alcohol in the United States of America.

 Unintended consequences….  Rise in crime and gangsterism. It helped the mafia more than anybody else.  Rise in consumption of unclean/bad alcoholic drinks.  Lack of respect for the government and the rule of law.

 Loss of jobs in breweries and increase in employment in bootlegging.  By 1923 there were 10,000 speakeasies in New York city alone.

 Can the buffer stock scheme be viewed as a government failure?  What about income taxes?

Other government failures….  Mexico City car control measures…

Other government failures…  Bill Clinton’s equality in employment legislation.

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Reasons for government failure.  1. Political self interest  2. policy myopia  Policy myopia arises when rational voters allow politicians to bias public investments towards short-term investments.

 3. vested interests  4. intervention results in incentives and disincentives  5. governments may have imperfect information.

 A decision by the government to raise taxes on de-merit goods (such as cigarettes) might lead to an increase in attempted tax avoidance, tax evasion, smuggling and the development of grey markets

Don’t get confused with Market Failure….  Market Failure occurs when there is a misallocation of resources due to imperfections in the workings of the market mechanism.

Other forms of market failure  Minimum wage- may push some out of a job.  Rent controls my reduce the rental propreties available.  A sales tax imposes an additional burden on society.

US National minimum wage  The US NMW is $7.25.

Top and bottom after the recession.  Income for the top 1 percent of US households rose dramatically in 2010, the first full year following the official end of the recession, according to recently released data. By contrast, the average income of the bottom 90 percent of households remained at its lowest level since 1983.

 But is that a market failure?