3. 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?

4. 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.

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

6. 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

7. 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.

8. 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

9. 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?

10. 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

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

12. 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

13. 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

15. 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

16. 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.

17. 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

18. 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.

19. Investigate how the UK government’s subsidies for bio fuels are an example of government failure.

20. 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.