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Economics 1.4.2

Economics- Edexcel 1.4.2

TermDefinition
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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