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52-handout - 5/18/2010 Government Failure AS Microeconomics...

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5/18/2010 1 Government Failure AS Microeconomics Intervention in the market place Government intervention Markets fail – government intervenes? Yes but there is always the risk of Yes – but there is always the risk of government and or regulatory failure!
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5/18/2010 2 What is government failure? Government failure occurs when a policy intervention leads to a deepening of the market failure or a new failure In other words – intervention creates further inefficiencies and a possible loss of welfare (1) Policies may have damaging long term consequences for an economy or society (2) Policies may be ineffective in meeting aims (3) Policies may create more losers than winners Root causes of government failure 1. The “law of unintended consequences” 2. Decisions made for pure political self interest 3. Low value for money from public sector investment 4. Government policy myopia 5. Regulatory capture 6. Disincentives arising from specific policies 7 Information failures in government policie 7. in government policies 8. The costs of regulation may outweigh the benefits
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5/18/2010 3 Law of unintended consequences Policies have effects that are unanticipated or unintended. Remember – economics is a social science! Lessons from behavioural economics–people rarely respond in a predictable way! Well intentioned legislation often acts against the interests of those it is intended to serve This law is crucial to understanding government failure–not all of the unintended consequences are negative! Negative unintended consequences Higher capital gains tax – reduces new house building worsens housing shortages /affordability Bank bail outs – raises the problem of moral hazard
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52-handout - 5/18/2010 Government Failure AS Microeconomics...

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