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Section 5 - Government Failure - Coggle Diagram
Section 5 - Government Failure
Misallocation of resources
Can cause a net welfare loss
Government failure is often a consequence of an intervention in market failure
Market distortions
Income taxes act as a disincentive to work hard, if you increase your earnings, you'll pay more tax
Minimum/ maximum prices lead to consumers overproducing. As there is no minimum pice, the price signals that stop large surpluses don't work
Subsidies may encourage inefficiency
Bureaucracy
Enforcement of rules and regulations by government officials 'red tape'
Red tape can interfere with the forces of supply and demand and reduce efficiency
Can lead to time lags as government's can't respond quickly to needs or producers
Can lead to a lack of investments, and prevent an economy from operating at full capacity
Conflicting objectives
One policy might have a negative impact on another
Stricter emission controls would contribute to environmental objectives, but this could increase firms costs
Governments often favour short term solutions when they're under pressure to solve issues quickly
Inqdequate information
Imperfect information can make it hard to assess the extent of a market failure
Governments may not know how the population wants resources to be allocated, the price mechanism may be better at allocating resources
Administrative costs
Governments measures can use large amounts of resources - this causes high costs
Policing is also expensive as it requires alot of time
Other causes
Regulatory capture - firms covered by regulatory bodes can have influene in decisions of the regulator
It takes time to work out where there is market failure, and then devise a plan to impletement it
Government policy can be affected by external shocks
Examples
CAP
Common agricultural policy
Correct market failure caused by fluctuating prices for agricultural products so farmers get a stable income
Pros
Encourages increase output as famrers are guaranteed a minimum price
Cons
Increase food prices cause poorer households to spend more on food
Governments need to sell stocks at a low price outside the EU, which negatively affects farmers there
Caused distortions in agricultural markets - it encourages oversupply whcih leads to a misallocation of resources, which causes a net welfare loss to society
Housing
Max rents are used to protect tenants
Can cause excess demand, as supply of rental property falls
Can cause a black market to form where landlords operate illegally
Shortage of properties impact the supply of workers, harder for firms to attract new staff
Public transport
Bus/ trains may be subsidised to reduce car usage
Bus transport can be seen as an inferior good, so demand may not increase even if its cheaper
Allocation of resources that doesn't cause a benefit can be seen as a misallocation of resources and leads to a net welfare loss
Road congestion schemes
Road congestion schemes can reduce external costs of road congestion
Charge is set at a level that results in the socially optimal level of traffic
Too low - limited impact, too high - too few will use the area causing reduced trade
Fishig Quotas
Attempt to make sure fish stocks remain stable
Fish stocks are still depleting, which suggests the quota has been set too high
Landing obligation - everything they catch must be kept on board - this is very difficult to police