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Economics 1.4.2
Economics- Edexcel 1.4.2
| Term | Definition |
|---|---|
| government failure | when government intervention in a market leads to a less efficient allocation of resources and makes a situation worse |
| when is there government failure? | when government intervention to correct market failure leads to either a net social welfare loss or the costs exceeds the benefits |
| what 3 things can government intervention be? | ineffective, inequitable and misplaced |
| name causes of government failure | political self interest, poor value for money, policy short-termism, regulatory capture, conflicting objectives, bureaucracy and red tape, unintended consequences |
| political self interest | government influence by influential political lobbying, e.g. drinks industry |
| poor value for money | low productivity or high waste makes government spending less effective, e.g. investment in ICT projects in the NHS |
| policy short-termism | governments are often looking for a quick fix solution for political purposes, e.g. road widening to reduce congestion |
| regulatory capture | when a government agency operates in favour of producers not consumers, e.g. drinks industry |
| conflicting objectives | one policy objective might conflict with another, e.g. min price could damage UK competitiveness |
| bureaucracy and red tape | costs of enforcement may hurt enterprise and incentives, e.g. costs of meeting health and safety and environmental laws |
| unintended consequences | policies have unanticipated or unintended side-effects, e.g. smoking ban led to an increased use of outdoor patio heaters |
| examples of unintended consequences | bank bail-outs(moral hazard), biofuel subsidy(divert production away from food), import tariffs on steel(damages to car makers), targets for treating patients(lower quality of care), minimum wage(reduction in staff non-wage benefits) |
| examples of regulatory failure | limit innovation in growth markets, capped prices prevents new firm entering markets, bureaucratic & costly, lacks the power to protect consumers, behind the curve with new technology, frequent rule changes can stifle business investment |
| regulatory capture | form of government failure that happens when a government agency operates in favour of producers rather than consumers |
| main causes of regulatory capture | asymmetric information, under-resourced (regulatory agencies may not have enough funding to scrutinise an industry properly), information gaps |
| why is regulatory capture important? | consumer interests may be harmed if regulators fail to hold suppliers to account, increased prices(regressive), damaging externalities |
| free market economists | distrustful of intervention and believe that the price mechanism should be allowed to operate |
| limited information | no government has all the resources available to make fully informed judgements and can be different with the benefit of hindsight |
| loss of equity | when decisions are made in the vested interest of special interest groups at the expense of other groups |
| net effects | not just a straightforward one-directional effect |
| main causes of government failure | impact on inequality, cost of compliance and implementation, possible unintended consequences or conflict with another micro or macro objective, information failures before a policy is introduced, policy may prove to be ineffective in changing behaviour |
| arguments for introducing a tax on junk foods | higher prices incentivise consumers to reduce demand / corrects market failure / tax revenues for funding / encourages reformulation by the manufacturers |
| disadvantages of junk food tax leading to government failure | inelastic or people just switch to items that aren’t taxed / inequitable / conflict with other objectives / administration costs |
| alternative interventions for taxes | subsidies, investment, advertising bans, evidence informed nudges |
| smoking ban government failure | patio heaters increase |
| landfill tax government failure | illegal fly-tipping |
| guarantee to all bank deposits government failure | moral hazard |
| import tariff on steel government failure | increased cost for car and construction companies |
| Scottish 50p per unit alcohol government failure | home brew |
| widen M25 government failure | induced demand |
| outsources renovation of social housing to private construction companies government failure | cost cutting increases risk of safety |
| moral hazard | a situation in which one party engages in risky behaviour or fails to act in good faith because it knows the other party bears the economic consequences of their behaviour |
Created by:
jessharris
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