Notes on government failure

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Government failure
This occurs when government intervention imposes on a cost greater than the benefits brought
about through the intervention. Therefore government intervention itself causes a misallocation of
resources and a net loss of economic welfare.
Sources of government failure
Inadequate information - Problems of shadow pricing positive and negative externalities.
Over valuing of negative externalities leading to over taxation or regulation damaging UK
international competitiveness
Conflicting objectives - conflict between economic efficiency and being equitable to all.
Petrol tax is an example as low income groups are hit more.
Administration costs- Regulation can be expensive to pursue due to legal costs and
enforcement. High costs of enforcement in illegal drug use. Abuse of schemes as well.
unintended outcomes- Crime and black markets/ relocation of businesses
Minimum pricing
Example of unintended consequences
minimum price in Scotland
Disequilibrium as demand contracts and supply expands meaning there is excess supply in
the market
However inelastic demand would mean there is less excess supply.
Minimum wage and unemployment is also an example


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