Government Failure

1
Government Failure
2
Sources of Government Failure
I
Inadequate Information
C
Costs
A
Admin Errors
U
Unintended Consequences
S
Self Interest
E
Expertise
3
Sources of Government Failure
Hint Click on a heading for more information
Inadequate Information
I
Costs
C
Admin Errors
A
Unintended Consequences
U
Self Interest
S
Expertise
E
4
Sources of Government Failure

• Inadequate Information
• Having all the information required to make a
  decision is rare
• Even if it is possible to get all the information
  the costs of gathering it may be prohibitive
• Governments may not even know all the information
  they require known unknowns and unknown
  unknowns
• This lack of knowledge may lead governments to
  make the wrong decisions or the right decisions
  but in the wrong quantities
• E.g. The government may impose a tax on
  cigarettes to correct the externality but fail to
  set it at the right price as they do not know the
  full cost of lung cancer

Inadequate Information
I
Costs
C
Admin Errors
A
Unintended Consequences
U
Self Interest
S
Expertise
E
Go Back
5
Sources of Government Failure

• Costs
• There is a significant cost to enforcing
  government policy.
• If this cost is too high then the cost of solving
  market failure may be higher than the costs
  caused by it.
• In this case the government should not intervene
  and Government failure would result if it did.
• E.g. The estimated cost of enforcing UK drug law
  is over 1bn a year. If the enforcement does not
  produce social welfare gain of more then 1bn
  then this would be an example of government
  failure

Inadequate Information
I
Costs
C
Admin Errors
A
Unintended Consequences
U
Self Interest
S
Expertise
E
Go Back
6
Sources of Government Failure

• Administration Errors
• Collecting all the statistics etc. for the
  government to make a decision is difficult.
• People have reasons to under report earnings etc.
• The behaviour people report and what they
  actually do can be different things.
• Time lags involved
• Sampling errors

Inadequate Information
I
Costs
C
Admin Errors
A
Unintended Consequences
U
Self Interest
S
Expertise
E
Go Back
7
Sources of Government Failure

• Unintended Consequences
• All policies will have unintended and unexpected
  side effects.
• Some of these will be good and some bad
• Sometimes they may be so bad that it would have
  been better if the government had not intervened.
• This is when government failure occurs
• This is linked with perfect information
• E.g. Banning certain drugs may be merited due to
  there being no equilibrium between MSC and MPB
  but it may lead to additional costs beyond the
  costs of enforcement.
• An increase in violent crime
• Worsening quality and so health risk from drugs
  due to cutting and lack of regulation etc.

Inadequate Information
I
Costs
C
Admin Errors
A
Unintended Consequences
U
Self Interest
S
Expertise
E
Go Back
8
Sources of Government Failure

• Self Interest
• The government keeps one eye on the polls.
• From their point of view this is rational as they
  presumably feel they have the best policies and
  wish to remain in power to enact them.
• There may be occasions where the government
  should enact certain policies but they would be
  so unpopular that they dare not do it.
• Equally it may be the case that there are certain
  times where they know they should not intervene
  (maybe the cost would be too high) but it would
  be politically unacceptable to do nothing
• Interventions with long pay back periods (more
  than 1 parliament) often dont happen as the
  cost are ascribed to this government but the
  benefits to the next
• E.g. It may be that the cost of keeping Cannabis
  as an illegal is too high (compared with the
  externalities it causes) and it should be
  legalised but this would be politically
  unacceptable.

Inadequate Information
I
Costs
C
Admin Errors
A
Unintended Consequences
U
Self Interest
S
Expertise
E
Go Back
9
Sources of Government Failure
Inadequate Information
I

• Expertise
• Government may lack the expertise to solve the
  problem.
• Many problems are not simple to solve
• The government may struggle to attract the best
  people if it cannot afford to pay as much as the
  private sector

Costs
C
Admin Errors
A
Unintended Consequences
U
Self Interest
S
Expertise
E
Go Back
10
Sources of Government Failure
Inadequate Information
I
I
Costs
C
C
Admin Errors
A
A
Unintended Consequences
U
U
Self Interest
S
S
Expertise
E
E