Government Failure

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  • Created on: 11-10-12 11:30
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Government Failure
Government failure can occur when the government intervenes in the market but this interference
leads to a loss of economic welfare.
Why does economic failure occur?
Inadequate information. Governments might not possess the right information to base a
decision on, sometimes the information that the government have can be misleading. So if
the government has wrong or misleading information, they might put the wrong law or policy
in place to fix a problem.
Conflicting Objectives. Governments may experience conflicting objectives. For example,
they might want to cut taxes but increase spending on education or healthcare. An example
of conflicting objectives is deciding whether to fund comprehensive schooling or selective
schooling. Governments might make the wrong decisions, meaning they might choose the
option which gives lower economic welfare rather than the higher economic welfare. The
government make the wrong decision because of lack of or the wrong type of information to
make the correct information.
Why are some examples of government failure?
High taxation on tobacco, alcohol and waste. High taxes have encouraged illegal smuggling
of cigarettes and alcohol into the UK. Organised crime has started up in these markets,
leading to smuggling on a massive scale. The government has lost a huge amount of tax
revenue from these illegal activities. The proposal by some councils to charge households an
extra fee if they have more than two sacks of rubbish collected each week might be
unworkable in practice. It may lead to fly tipping or disputes over the ownership of rubbish
Road Pricing. A road congestion scheme will help reduce external costs such as traffic, air and
noise pollution. However, if the charge is set too high it could lead to an under-utilisation of
road space. It may also be unfair to low income families who cannot afford to pay the daily
Government Bureaucracy (red tape). There are government rules, known as red-tape, that
hinder the operation of market forces: for example, concerning the proposals for building a
third runway at Heathrow Airport. There are several time-consuming planning enquiries that
have to be undertaken before major projects, like the third runway, to go ahead. This could
lead to an underinvestment in infrastructure in the economy, reducing UK investment and UK
international competitiveness.


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