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Government Failure

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An AS Level Economics revision presentation looking at the causes of government failure.. – PowerPoint PPT presentation

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Title: Government Failure


1
Government Failure
2
Sources of Government Failure
I
Inadequate Information
C
Costs
A
Admin Errors
U
Unintended Consequences
S
Self Interest
E
Expertise
3
Sources of Government Failure
Hint Click on a heading for more information
Inadequate Information
I
Costs
C
Admin Errors
A
Unintended Consequences
U
Self Interest
S
Expertise
E
4
Sources of Government Failure
  • Inadequate Information
  • Having all the information required to make a
    decision is rare
  • Even if it is possible to get all the information
    the costs of gathering it may be prohibitive
  • Governments may not even know all the information
    they require known unknowns and unknown
    unknowns
  • This lack of knowledge may lead governments to
    make the wrong decisions or the right decisions
    but in the wrong quantities
  • E.g. The government may impose a tax on
    cigarettes to correct the externality but fail to
    set it at the right price as they do not know the
    full cost of lung cancer

Inadequate Information
I
Costs
C
Admin Errors
A
Unintended Consequences
U
Self Interest
S
Expertise
E
Go Back
5
Sources of Government Failure
  • Costs
  • There is a significant cost to enforcing
    government policy.
  • If this cost is too high then the cost of solving
    market failure may be higher than the costs
    caused by it.
  • In this case the government should not intervene
    and Government failure would result if it did.
  • E.g. The estimated cost of enforcing UK drug law
    is over 1bn a year. If the enforcement does not
    produce social welfare gain of more then 1bn
    then this would be an example of government
    failure

Inadequate Information
I
Costs
C
Admin Errors
A
Unintended Consequences
U
Self Interest
S
Expertise
E
Go Back
6
Sources of Government Failure
  • Administration Errors
  • Collecting all the statistics etc. for the
    government to make a decision is difficult.
  • People have reasons to under report earnings etc.
  • The behaviour people report and what they
    actually do can be different things.
  • Time lags involved
  • Sampling errors

Inadequate Information
I
Costs
C
Admin Errors
A
Unintended Consequences
U
Self Interest
S
Expertise
E
Go Back
7
Sources of Government Failure
  • Unintended Consequences
  • All policies will have unintended and unexpected
    side effects.
  • Some of these will be good and some bad
  • Sometimes they may be so bad that it would have
    been better if the government had not intervened.
  • This is when government failure occurs
  • This is linked with perfect information
  • E.g. Banning certain drugs may be merited due to
    there being no equilibrium between MSC and MPB
    but it may lead to additional costs beyond the
    costs of enforcement.
  • An increase in violent crime
  • Worsening quality and so health risk from drugs
    due to cutting and lack of regulation etc.

Inadequate Information
I
Costs
C
Admin Errors
A
Unintended Consequences
U
Self Interest
S
Expertise
E
Go Back
8
Sources of Government Failure
  • Self Interest
  • The government keeps one eye on the polls.
  • From their point of view this is rational as they
    presumably feel they have the best policies and
    wish to remain in power to enact them.
  • There may be occasions where the government
    should enact certain policies but they would be
    so unpopular that they dare not do it.
  • Equally it may be the case that there are certain
    times where they know they should not intervene
    (maybe the cost would be too high) but it would
    be politically unacceptable to do nothing
  • Interventions with long pay back periods (more
    than 1 parliament) often dont happen as the
    cost are ascribed to this government but the
    benefits to the next
  • E.g. It may be that the cost of keeping Cannabis
    as an illegal is too high (compared with the
    externalities it causes) and it should be
    legalised but this would be politically
    unacceptable.

Inadequate Information
I
Costs
C
Admin Errors
A
Unintended Consequences
U
Self Interest
S
Expertise
E
Go Back
9
Sources of Government Failure
Inadequate Information
I
  • Expertise
  • Government may lack the expertise to solve the
    problem.
  • Many problems are not simple to solve
  • The government may struggle to attract the best
    people if it cannot afford to pay as much as the
    private sector

Costs
C
Admin Errors
A
Unintended Consequences
U
Self Interest
S
Expertise
E
Go Back
10
Sources of Government Failure
Inadequate Information
I
I
Costs
C
C
Admin Errors
A
A
Unintended Consequences
U
U
Self Interest
S
S
Expertise
E
E
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