Government Intervention and Government failure

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Government Intervention and Government failure:

Government Intervention and Government failure

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What kinds of market failure are there? Negative externalities of production Negative externalities of consumption Positive externalities of production Positive externalities of consumption Other types of market failure? Information failure Immobility Market power Inequality of wealth and income How can government fix these types of market failure? In groups write your ideas down on flip charts Think about how they can fix but also What are the problems with government getting involved? Samy Manaf Shivani Martina Matthew Karabo Fawaz Sethi Ali Nikhil Pavithra

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Government Failure Instead of reducing market distortions and improving economic efficiency and welfare government increases market distortions, decreases efficiency and increases welfare loss An example – keeping the Millennium Dome standing empty in 2002 cost nearly GBP30 million of public money This is a misuse of resources There are several reasons why government intervention may do this Information problems Bureaucracy Time lags Abuse of government power Reduction in incentives Distributional problems Complete activity 1 on P200 (MC) Government failure occurs when government intervention increases inefficiency or welfare

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Information problems To be able to fix the problem government has to gather information such as How big is the externality The social benefit gained from public goods This is difficult to measure and so the information they are working with can be inaccurate The diagram shows how if the government overestimates the external cost (the difference between MPC and MSC) by placing a very large tax of ab they could move the output further away from the socially optimum level Look at activity 2 and discuss Government failure occurs when government intervention increases inefficiency or welfare

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Bureaucracy, time lags and abuse of government power Government policy making and intervention requires resources in the form of labour, land and capital If the state employs too many resources or uses them inefficiently this will reduce economic welfare High numbers of government officials and civil servants may result in inflexible and bureaucratic procedures which will be slow to respond to changing economic circumstances Government is slow It takes time to recognise MF It takes time to create a policy It takes time to implement a policy By the time the policy is implemented things may have changed and the information used to decide the policy may be out of date

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Bureaucracy, time lags and abuse of government power There is a risk of politicians and civil servants abusing their power They may pursue their own financial and career interests rather than seek to increase the public good A government minister may try to increase the size of his/her department to increase her profile Politicians views and actions may be influenced by their outside business interests Perhaps they have shares in a tobacco company and would oppose measures to reduce smoking Read and discuss Activity 3

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Lack of continuity of policies, reduction in incentives and distortionary effects If there are frequent changes in government policy measures it is difficult for firms to plan If subsidies and corporation tax keep changing firms will lose confidence Government intervention can reduce efficiency by removing incentives Setting minimum prices and buying up surpluses will mean inefficient producers may survive Unemployment benefit may discourage some people from seeking employment High taxes may reduce the incentive to work Public sector companies have little competition and may not keep costs down If they are given targets they may change their priorities and manipulate data Taxing demerit goods will affect low income families more (inequity) Read and discuss activity 4

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Summary Government failure arises when government intervention increases economic efficiency If government lacks information or has inaccurate information it may move output further away from the social optimum Bureaucracy wastes resources, time lags can result in policy measures being implemented too late and the abuse of government power can cause economic inefficiency Frequent changes make it difficult for firms and households to plan Government intervention can remove incentives Complete MC and DataResponse P202/3

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