Transcript Government-Failurex

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?
http://en.wikipedia.org/wiki/Dangerous_Dogs_Act_1991
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.
Distortion of price signals
■ Often seen in agricultural and labour markets
■ Gov’t may intervene to stabilise agricultural prices and farm incomes
(CAP)
Price
This allows farmers to
remain profitable and
stay in business.
However it means that
domestic consumers
have to pay higher
prices for the product.
S
Min Price
Mkt Price
D
Qd
Qs
Excess supply
Quantity of
Wheat
CAP (in a nutshell!)
■ ½ of European Commission budget spent on CAP
■ 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 complete waste of
resources
■ Many countries object to CAP and it is criticised by
the WTO
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?
Distorting Mkt Forces – Min Wage
■ Aim to reduce poverty among lowest paid
■ Trade-off means increased unemployment
Wage
S labour
Min Wage
Free Mkt Wage
D labour
Qd
Qs
Unemployment
Quantity of Labour
Distortion of Mkt Forces
– Income Tax
■ Two main tax rates – 22% and 40%
■ If tax rate set too high → reduced incentive to work → less tax revenue
collected
■ Also may encourage tax evasion → gov’t may end up losing money
■ Overall, less working, less tax revenue, economy becomes less
competitive
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
Distortion of Mkt Forces
– Rent Conrol
■ Gov’t may put restrictions on rent rises
■ May ↓ availability / quality of rental property
Rent
S
Mkt Rent
Max Rent
D
QS
QD
Shortage
Quantity of flats
Unintended consequences
Smoking ban leads to
an increase in
demand for patio
heaters?
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
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.
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
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.
Investigate how the UK government’s subsidies for bio fuels are an example of government
failure.
http://news.bbc.co.uk/1/hi/uk/7581436.stm
http://www.policyexchange.org.uk/news/news
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.
http://news.bbc.co.uk/1/hi/uk
http://en.wikipedia.org/wiki/Individual_Learning_Account
http://www.dcsf.gov.uk/ila
As we are
reading the
article…
 Highlight key words
 Look out for
arguments you can
use to support your
evaluation of
government failure
questions