Government Failure – AS/A LEVELS/IB/IAL
Government Failure – AS/A LEVELS/IB/IAL
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Government Failure
Government failure occurs when the government intervenes to correct market failure but ends up creating a worse outcome.
This results in a Welfare Net Loss.
Market Failure
Market failure occurs when the forces of supply and demand fail to efficiently allocate resources.
Examples of government failure in markets
Over-fishing – Extension of property rights
The common fisheries policy was introduced in the EU to protect fish stocks. However this policy did not work and led to government failure. The fishing quotas made fishermen throw back excess stock of dead fish into the water to ensure they did not exceed their quota’s. This caused further negative externalities and harm to the already depleting fish stocks.
Indirect Taxes
Indirect taxes were introduced to increase the price of some products that were seen as negative externalities such as cigarettes. However a very high indirect taxes led to government failure due to increased smuggling of cigarettes.
Subsidies
Subsidies to firms can cause government failure because it can restrict market competition. A subsidy to an inefficient firm will allow the firm to run without becoming more efficient.
Agriculture
The guaranteed minimum price scheme causes government failure through the creation of excess supply over demand. This extra stock creates a large storage cost for the government. In some cases, perishable stock will be thrown away and wasted if they can’t sell it.
Governments have also been known to sell stock at incredibly low prices abroad distorting domestic prices for these agricultural products. This is now illegal and known as dumping.
Housing policies
Government intervention in the housing market through low rent control can cause an illegal rental market. Low rents can cause an excess demand over supply of rental properties. Therefore, some tenants will be willing to pay higher rents to secure a rental property due to the high demands caused by rental control.
Welfare benefits
High welfare benefits can lead to government failure. There’s no incentive for people to work when benefit payments are nearly equal to or higher than the income they could earn through employment.
Unintended Consequences (AQA Spec)
The actions of producers or consumers have unintended consequences
The implementation of government policies may cause consumers to react in unexpected ways
Distortion of Price Signals (AQA Spec)
Price Signals and the Free Market Price Mechanism could be distorted as a result of government subsidies, leading to government failure
Quick Fire Quiz – Knowledge Check
1. Define ‘Government Failure’ (2 marks)
2. Identify five examples of a Government Failure (4 marks)
3. Using an example, explain how Government Failure can be caused (4 marks)
4. Using a different example, explain how Government Failure can be caused (4 marks)
Next Revision Topics:
A Level Economics Past Papers
