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96-handout - Microeconomics Government Failure May 2011...

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Microeconomics Government Failure May 2011 www.tutor2u.net 1 Micro: Aspects of Government Failure What is government failure? Government failure occurs when a policy intervention leads to a deepening of a market failure or even worse a new failure may arise In other words – intervention causes a loss of allocative efficiency and a loss of welfare (1) Policies may have damaging long term consequences for the economy and/or society (2) Policies may be ineffective in meeting aims (3) Policies may create more losers than winners
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Microeconomics Government Failure May 2011 www.tutor2u.net 2 Root causes of government failure 1. Decisions made in political self interest 2. Low value for money from public sector investment 3. Policy myopia–short termism 4. Regulatory capture / failure arising from lobbying 5. Disincentive effects arising from specific policies 6. Information failures / failures to use proper trials 7. The “law of unintended consequences” 8. Costs of regulation may outweigh the benefits Political self interest Government may be unduly influenced by lobbying from interest groups Examples EU farm support policies Import protectionism Failures to reform / overhaul the banking system Transport investment (power of the road / air lobby) Caps on inward migration
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Microeconomics Government Failure May 2011 www.tutor2u.net 3 Protectionism and government failure Value for money issues What is the social benefit of public sector spending? Is the government getting proper value for money ? Good grounds for thinking that public goods can be provided efficiently–e.g. Economies of scale But there are risks 1. Over staffing in public sector industries 2. Relatively low productivity compared to market sector 3. Excessive costs of bureaucracy Note though–waste is not the preserve of government–there are plenty of examples of private sector waste
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Microeconomics Government Failure May 2011 www.tutor2u.net
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This note was uploaded on 02/08/2012 for the course FIN FIN4345 taught by Professor Koij during the Spring '10 term at FIU.

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96-handout - Microeconomics Government Failure May 2011...

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