The Possibility of Government The Possibility of Government FailureFailure

By the end of this lesson, you:By the end of this lesson, you:

• Must know the causes of government Must know the causes of government failure.failure.

• Should understand how the CAP Should understand how the CAP works.works.

• Could be able to evaluate the effects of Could be able to evaluate the effects of government failure upon the allocation government failure upon the allocation of resources.of resources.

Effects of Government InterventionEffects of Government Intervention1.1. Public goods – think of one positive effect and one negative Public goods – think of one positive effect and one negative

effect.effect.2.2. ExternalitiesExternalities

1.1. Regulation – what’s this?Regulation – what’s this?2.2. Pollution permits – what are the incentives?Pollution permits – what are the incentives?3.3. Taxes – supply curve shift (left or right?)Taxes – supply curve shift (left or right?)

3.3. Correcting information failures – think of an exampleCorrecting information failures – think of an example4.4. Price intervention – when would you draw the following Price intervention – when would you draw the following

diagrams?diagrams?1.1. Buffer stock diagram showing the maximum price and minimum Buffer stock diagram showing the maximum price and minimum

priceprice2.2. Buffer stock diagram showing one stable price and shifts in the Buffer stock diagram showing one stable price and shifts in the

supply curvesupply curve5.5. Regulation and the control of power – what does the Regulation and the control of power – what does the

Competition Commission do?Competition Commission do?6.6. Redistribution of income:Redistribution of income:

1.1. What are means-tested benefits?What are means-tested benefits?2.2. What are in-kind benefits?What are in-kind benefits?

Causes of Government FailureCauses of Government Failure• Political self-interestPolitical self-interest

– What is fiscal policy?What is fiscal policy?– What is the difference between active and discretionary fiscal What is the difference between active and discretionary fiscal

policy?policy?– When might a government opt for each?When might a government opt for each?

• Policy myopiaPolicy myopia– Should UK industries be protected?Should UK industries be protected?– Should the USA have bailed out the car industries in 2009?Should the USA have bailed out the car industries in 2009?

• Regulatory capture – what are the main objectives of the CAP II Regulatory capture – what are the main objectives of the CAP II (1992)?(1992)?

• Disincentive effects – draw a diagram to show how a national Disincentive effects – draw a diagram to show how a national minimum wage might work (Quantity of Labour against Wage minimum wage might work (Quantity of Labour against Wage Rate)Rate)

• Policy decisions based on imperfect information – let market Policy decisions based on imperfect information – let market forces ruleforces rule

• What is the law of unintended consequences?What is the law of unintended consequences?• Costs of administration and enforcementCosts of administration and enforcement• Conflicting objectives – what might happen if a government Conflicting objectives – what might happen if a government

stimulates AD and does not introduce supply-side reforms.stimulates AD and does not introduce supply-side reforms.

National Minimum WageNational Minimum Wage

National Minimum WageNational Minimum Wage1.1. A NMW set above the free-market wage for certain groups ____________ the marginal cost A NMW set above the free-market wage for certain groups ____________ the marginal cost

of employing people - so firms will cut jobs, reduce hours of work for employees and of employing people - so firms will cut jobs, reduce hours of work for employees and

unemployment will rise. unemployment will rise. 

2.2. Other workers will demand higher wages to maintain pay differentials (this is known as Other workers will demand higher wages to maintain pay differentials (this is known as

"pay leap-frogging"). An ________________ in the total wage bill may cause cost-push "pay leap-frogging"). An ________________ in the total wage bill may cause cost-push

inflation and damage the price competitiveness of UK producers in international markets. inflation and damage the price competitiveness of UK producers in international markets. 

3.3. __________ and low-skilled workers will lose out - firms will tend to employ __________ __________ and low-skilled workers will lose out - firms will tend to employ __________

workers whose experience is greater. There will be a substitution effect that works against workers whose experience is greater. There will be a substitution effect that works against

younger participants in the labour market.younger participants in the labour market.

4.4. Some firms may ____________ investment in worker training because of falling profits. Some firms may ____________ investment in worker training because of falling profits. 

5.5. A minimum wage does not reduce ______________ because many poor households do not A minimum wage does not reduce ______________ because many poor households do not

have a low-income earner. Poverty is concentrated in those groups where no one is in have a low-income earner. Poverty is concentrated in those groups where no one is in

paid employment. A minimum wage has little direct effect on these households - better to paid employment. A minimum wage has little direct effect on these households - better to

introduce a minimum income guarantee. introduce a minimum income guarantee. 

6.6. A NMW does not take into account ________________ differences in cost of living and will A NMW does not take into account ________________ differences in cost of living and will

have a distortionary effect on the way the UK labour market works.have a distortionary effect on the way the UK labour market works.

National Minimum WageNational Minimum Wage1.1. A NMW set above the free-market wage for certain groups A NMW set above the free-market wage for certain groups increasesincreases the marginal cost of the marginal cost of

employing people - so firms will cut jobs, reduce hours of work for employees and employing people - so firms will cut jobs, reduce hours of work for employees and

unemployment will rise. unemployment will rise. 

2.2. Other workers will demand higher wages to maintain pay differentials (this is known as Other workers will demand higher wages to maintain pay differentials (this is known as

"pay leap-frogging"). An "pay leap-frogging"). An increaseincrease in the total wage bill may cause cost-push inflation and in the total wage bill may cause cost-push inflation and

damage the price competitiveness of UK producers in international markets. damage the price competitiveness of UK producers in international markets. 

3.3. Young Young and low-skilled workers will lose out - firms will tend to employ and low-skilled workers will lose out - firms will tend to employ olderolder workers workers

whose experience is greater. There will be a substitution effect that works against younger whose experience is greater. There will be a substitution effect that works against younger

participants in the labour market.participants in the labour market.

4.4. Some firms may Some firms may reducereduce investment in worker training because of falling profits.  investment in worker training because of falling profits. 

5.5. A minimum wage does not reduce A minimum wage does not reduce povertypoverty because many poor households do not have a because many poor households do not have a

low-income earner. Poverty is concentrated in those groups where no one is in paid low-income earner. Poverty is concentrated in those groups where no one is in paid

employment. A minimum wage has little direct effect on these households - better to employment. A minimum wage has little direct effect on these households - better to

introduce a minimum income guarantee. introduce a minimum income guarantee. 

6.6. A NMW does not take into account A NMW does not take into account regionalregional differences in cost of living and will have a differences in cost of living and will have a

distortionary effect on the way the UK labour market works.distortionary effect on the way the UK labour market works.

The Law of Unintended The Law of Unintended ConsequencesConsequences

Smoking Ban in Scotland

The Possibility of Government The Possibility of Government FailureFailure

By the end of this lesson, you:By the end of this lesson, you:

• Must know the causes of government Must know the causes of government failure.failure.

• Should understand how the CAP Should understand how the CAP works.works.

• Could be able to evaluate the effects of Could be able to evaluate the effects of government failure upon the allocation government failure upon the allocation of resources.of resources.