Government failure
exists when the government intervenes to correct a market failure, but this
result in a more inefficient allocation of resources. All over the world there
are main causes of government failure. Some examples are….
1) Mexico City and emissions from cars –
tackling transport market failure.
A
good example of government failure is Mexico’s approach to reducing co2
emissions in Mexico City. Their policy was very simple. Cars with even/odd
number plates were allowed into the city on alternate days, which in theory
should have reduced the number of cars entering the city by a half. However,
the reality was very different. Car owners sold their nice cars and bought two,
older and more polluting cars one with an even number plate and one with an odd
number plate, resulting in inefficient use of government money and government
failure.
2) The common agricultural policy (CAP) –
tackling agricultural market failure.
The
aim of CAP is to stabilize agricultural prices and provide a satisfactory level
of income for farmers in the European Union (EU). However, the outcome is
inefficient. Farmers produce too much, and excess supply is bought by the EU
and stored (causing ‘wine lakes’ and ‘butter mountain’) so the EU has to pay
subsidies to farmers and pay for warehouses and storage. Result an inefficient
use of government money and government failure.
3) The national minimum wage – tackling
labour market failure.
This
was introduced to protect workers who received low pay, by making it illegal for
employers to pay a wage below the NMW. However those workers who managed to
retain their job ended up with higher pay, but some workers would lose jobs and
therefore be worse off.
4) Rent control – tackling housing market
failure.
Any
people in the UK struggle to pay for ever more expensive housing, especially
with the increasing housing shortage in the south east. If the government were
to consider the level of rent to be unacceptable high, then they could impose a
maximum rent. Maximum prices are set below the market equilibrium price; so
that in this case demand for houses exceeds supply of houses causing housing
shortage some people will be worse off.
If
market fails government intervene to correct market failure. However if market
fails so too can government. GOVERNMENT FAILURE occurs when it intervenes in
the market but this intervention lead to loss of economic welfare rather than
gain.
There are number of reasons why
government failure occurs.
± Inadequate
information: Government may not have
complete information on which to base a decision. In some cases information may
be misleading. The government may make a wrong policy response with the
available information or misleading information. For instance government has to
take decision whether to fund a selective school (A selective
school is a
school that admits students on the basis of some sort of selection criteria,
usually academic.) or comprehensive school (comprehensive school is a state school that does not
select its intake on the basis of academic achievement or aptitude.).
The issue is important as education is the key determinant of the long term
competitiveness of a country. It also affects every child.
± Conflicting
objectives: government often faces conflicting objectives. For instance, they
may want to cut taxes but increase spending on defense. Every decision made by
government has opportunity cost. Similarly in case of education assume those
who receiving a selective education receives better education in contrast those
who fails to get into selective schools achieves less. Government may fail to
decide or do it purposely for rewarding their supporters in electorate.
± Administrative
cost: Sometimes correcting market failure may be too costly that it may
outweigh the welfare benefit to correct market failure.
± Market
distortion: In some cases government
intervention to correct one market failure leads to the creation of far more
serious market failure. One example is national minimum wage.
Public Choice
Theory
It
is generally assumed that government act for maximizing economic welfare and
they may not succeed in this due to lack of information, conflicting
objectives, cost etc. However PUBLIC CHOICE THEORY suggests that government may
not attempt to maximize economic welfare at all. Public choice theory analyses
how public spending and taxation decision are made. Consumers or customers are voters in system.
The vote for politicians and political parties whore are the producers in the
system. Producers make decisions about how public money should be spent, about
taxes and about law.
Voters
want to maximize the benefits they get from state. Politician wants to retain
power. Hence they will benefit their supporters
Public
Choice Theory explains why government often fails
- Local interest: The politicians may work for their own benefit and to retain power and they may not go according to economic welfare but try to take care of the people who vote them for example. If a government decide to close a factory or move a factory which is near residential area. Local MP can force government not to do so as if the factory is closed all the employ who are working will be unemployed and the politician may lose that votes.
- Favoring minorities: It is seen that minorities would cast their votes and they are too important for politicians as they can change the scenario and hence they may put some of the policies favoring minorities and leave majority of people away from the benefits
- Conflicting personal interests: Politicians, parties and government may be prone to corruption. Apart from wishing to gain votes and power politicians may be willing to gain wealth too. Hence the decisions may be made in their own personal interest instead of being made for the welfare of the society.
- Short – termism: Government may lay down some policy for the economic welfare but these policies may be long term policies and if the government changes within some period of time then they may not be able to continue with the welfare policy as the new government may or may not continue the policy.
- Regulatory capture: Government
is responsible for regulating many areas, such as monopolies, or the
environment. Regulatory capture means that groups such as monopolists earning
abnormal profit or polluters damaging the environment can strongly influence
the way they are being regulated to their own advantage.