STUDENT NAME: Abass Gbla

STUDENT ID: 10102295

COURSE NAME/CODE: Principles of Economics (ECM 103)

ASSIGNMENT QUESTION: Discuss the causes of government failure and explain how

it can be corrected.

ATTEMPT COUNT: 1
Introduction

This research paper will talk over or analyze the causes of government failure and

how they can be corrected. Generally, government does not always carry out its economic

functions effectively and efficiently. As a widely known fact, the issue of government

failure has recently gained research attention from academics. Over the years, there has been

an expansion of the so-called 'public choice' school, dealing with the insinuations for the

actions of government and other public agencies of the idea that, all civil servants work for

their best interest. However, this paper will explore the causes of government failure that

normally obstruct economic efficiency in the public sector. Such failure may range from

small, when intervention is simply unsuccessful, but where damage is limited to the cost of

resources expended and worn out by the intervention, to cases where intervention creates

new and other serious problems that never exited before.

Governments are part of our social order and they establish a groundwork of rules

and laws to correct harmful externalities, and to make available public goods. However,

many people think democracy to be the perfect form of government, because they believe it

creates an avenue where they can choose representatives who, they think will work for their

own interest. In spite of this, several cases, even democratic governments fail often to act in

the best interests of the voters who elected them. The paper is orderly presented as follows:

The first part of it discusses the most rampant causes of government failure around

the world. Followed by that, a second part of it introduces some of the approaches a

government can take in order to correct its failure. The final part summarizes and concludes

with some inferences for "Government failure" and how such failure may be corrected.
Causes of Government Failure

Causes of Government Failure

Government intervention can prove to be ineffective, inequitable and misplaced.

(a) Political self-interest

 The pursuit of self-interest amongst politicians and civil servants can often lead to a

misallocation of resources.

 For example decisions about where to build new roads, by-passes, schools and

hospitals may be decided with at least one eye to the political consequences.

 The pressures of a looming election or the influence exerted by special interest

groups can foster an environment in which inappropriate spending and tax decisions

are made. - e.g. boosting welfare spending in the run up to an election, or bringing

forward major items of capital spending on infrastructural projects without the

projects being subjected to a full and proper cost-benefit analysis to determine the

likely social costs and benefits. Critics of current government policy towards

tobacco taxation and advertising, and the controversial issue of genetically modified

foods argue that government departments are too sensitive to political lobbying from

the major corporations.

(b) Policy myopia

  Critics of government intervention in the economy argue that politicians have a

tendency to look for short term solutions or "quick fixes" to difficult economic

problems rather than making considered analysis of long term considerations.

 For example, a decision to build more roads and by-passes might simply add to the

problems of traffic congestion in the long run encouraging an increase in the total

number of cars on the roads.

 The risk is that myopic decision-making will only provide short term relief to

particular problems but does little to address structural economic problems.

 Critics of government subsidies to particular industries also claim that they distort

the proper functioning of markets and lead to inefficiencies in the economy. For

example short term financial support to coal producers to keep open loss-making

coal pits might prove to be a waste of scarce resources if the industry concerned has

little realistic prospect of achieving a viable rate of return in the long run given the

strength of global competition.

(c) Regulatory Capture

 This is when the industries under the control of a regulatory body (i.e. a government

agency) appear to operate in favour of the vested interest of producers rather can

consumers

 Some economists argue that regulators can prevent the ability of the market to

operate freely. We might find examples of this in agriculture, telecommunications,

the main household utilities and in transport regulation.

  For example, to what extent has the system of agricultural support known as

the Common Agricultural Policy operated too much in the interests of farmers and

the farming industry in general? And as a result, has the CAP worked against the

long-term interest of consumers, the environment and developing countries who

claim that they are being unfairly treated in world markets by the effects of import

tariffs on food and export subsidies to loss-making European farmers?

(d) Disincentive effects

 Free market economists who fear government failure at every turn argue that

attempts to reduce income and wealth inequalities can

worsen incentives and productivity. They would argue against the National

Minimum Wage because they believe that it artificially raises wages above their

true free-market level and can lead to real-wage unemployment.

 They would argue against raising the higher rates of income tax because it is

deemed to have a negative effect on the incentives of wealth-creators in the economy

and generally acts as a disincentive to work longer hours or take a better paid job.

(e) Government intervention and evasion

 A decision by the government to raise taxes on de-merit goods such as cigarettes

might lead to an increase in attempted tax avoidance, tax evasion, smuggling and

the development of grey markets where trade takes place between consumers and

suppliers without paying tax

A decision to legalize and then tax some drugs might lead to a rapid expansion of the supply
of drugs and a substantial loss of social welfare arising from over consumption.

(f) Policy decisions based on imperfect information

 How does the government establish what citizens want it to do in their name? Can

the government ever really know the true revealed preferences of so many people?

 Often a government will choose to go ahead with a project or policy without having

the full amount of information required for a proper cost-benefit analysis. The result

can be misguided policies and damaging long-term consequences.

 How does the government know how many extra houses need to be built in the UK

over the next twenty years? Is building thousands of extra homes in an already

congested South-east the right option? Are there better solutions? There have been

plenty of instances of government housing policy having failed in previous decades!

(g) The Law of Unintended Consequences

 The law of unintended consequences is that actions of consumer and producers —

and especially of government—always have effects that are unanticipated or

"unintended." Particularly when people do not always act in the way that the

economics textbooks would predict

 The law of unintended consequences is often used to criticise the effects of

government legislation, taxation and regulation. People find ways to circumvent

laws; shadow markets develop to undermine an official policy; people act in

unexpected ways because of ignorance and / or error. Unintended consequences can

 add hugely to the financial costs of some government programmes so that they make

them extremely expensive when set against their original goals and objectives.

(h) Costs of administration and enforcement

Government intervention can prove costly to administer and enforce. The estimated social

benefits of a particular policy might be largely swamped by the administrative costs of

introducing it.

How can the government avoid public sector failure?

1. Introduce profit incentives/performance targets into the government sector.

There is no reason why those working in the public sector can’t be given performance

targets. For example, schools can be given targets to achieve minimum exam standards and

climb up the league tables of exam performance. People working in the public sector can be

paid piecemeal – rather than per hour. For example, rather than pay refuse collectors £8.00

an hour. They could be paid £64 a day to do a job estimated to take 8 hours. This gives them

an incentive to work faster and not dawdle on the job.

Evaluation. It can be difficult to introduce the profit motive into many areas of the public

sector. For example, education and healthcare do not lend themselves so well to

performance targets and profit motives. Schools which target better exam results may do so

at the cost of excluding less intelligent pupils. They may sacrifice other aspects of an all-

rounded education to get better exam results. Managers in a hospital may be able to cut
 costs, but the consequence may be to put greater pressure on nurses and doctors – it may

compromise the standards of health care.

The problem is that the government tends to get involved in public services which are either

not provided by the free market or are under-provided (e.g. merit goods and public goods).

The problem of these public services is that they are not natural profit oriented industries.

2. Competition

One thing the Conservative government did in the 1980s was to introduce competitive

tendering for many public services. This meant local councils lost their monopoly provision

of public services, such as school meals and refuse collection. Council services could still

bid to run refuse collection. But, if a private company offered a better service, then they

would lose out to the private sector. The argument is that the threat of competition creates

incentives for the public sector to act like a private company and cut costs.

 Evaluation. The problem with competitive tendering is that the cheapest service

may not be the best.  A private company may offer to provide school meals for a cheap cost

but at the expense of reducing the quality of food. Therefore, you reduce costs, but you have

a decline in standards. A government body then needs to be responsible for checking

standards of service.

Many public services are natural monopolies, therefore, competition is hard to introduce. If

you get the right to run a refuse collection for five years, a private company effectively has a

private monopoly for five years.

In the 1980s, public bus companies lost their legal monopoly and competition was

introduced, with private companies such as Stagecoach entering the market. However, this

means that there is often an overlap and duplication of bus services, leading to increased

congestion. Also, with private companies, fare increases lead to higher profit for private

companies, rather than benefiting the local council.

3. Public-private partnerships

Another policy is to try and encourage public-private partnerships. This means that for a

project, the government try to involve the private sector. The private sector pays part of the

cost and brings expertise and the incentives of the private sector into the project.

The downside is that private companies tend to cherry-pick projects. They benefit from

government investment, but they get the profit rather than the government.

4. Rely on good-will

Some public services are sectors of the economy where the usual profit motivate is not all

dominant. For example, most doctors, nurses and healthcare workers choose their profession

– not to maximise earnings but to gain satisfaction from serving patients. What healthcare

professionals need is not performance related pay, but working conditions conducive to

good morale. If staff are overworked or have too much paperwork – this can lead to poor

morale. Reducing bureaucracy and creating a well-funded health care system is a powerful

way to get the most from government funds. It is a similar situation in education, with many

teachers over-worked from filling in forms.

Government failure may range from the trivial, when intervention is merely ineffective, but

where harm is restricted to the cost of resources used up and wasted by the intervention, to

cases where intervention produces new and more serious problems that did not exist before.

The consequences of this can take many years to reverse.

When discussing any government policy intervention, look to see if you can make an

evaluative comment on the risk of policy failure / ineffectiveness

Government failure in a non-market economy

  The collapse of the Soviet Union in the late 1980s marked the failure of command

economies as a means of allocating resources among competing uses.

 The essence of a command economy was that the state planning mechanism would

decide what to produce and how to produce it and for whom to produce.

 Government failure occurred when the central planners produced products that were

not wanted by consumers – causing a loss of allocative efficiency, since there was no

price mechanism to signal changes in consumer preferences and demand.

 Another failing of the pure command economy was that there was little incentive for

workers to raise productivity; poor quality control; and little innovation by firms as

no profit motive existed.

 Command economies also suffered massive environmental de-gradation because

they did not posses structures for valuing the environment and giving consumers and

producers the right incentives to protect their environmental heritage.

Causes of Government Failure

Government intervention can prove to be ineffective, inequitable and misplaced.

(a) Political self-interest

 The pursuit of self-interest amongst politicians and civil servants can often lead to a

misallocation of resources.

 For example decisions about where to build new roads, by-passes, schools and

hospitals may be decided with at least one eye to the political consequences.
  The pressures of a looming election or the influence exerted by special interest

groups can foster an environment in which inappropriate spending and tax decisions

are made. - e.g. boosting welfare spending in the run up to an election, or bringing

forward major items of capital spending on infrastructural projects without the

projects being subjected to a full and proper cost-benefit analysis to determine the

likely social costs and benefits. Critics of current government policy towards

tobacco taxation and advertising, and the controversial issue of genetically modified

foods argue that government departments are too sensitive to political lobbying from

the major corporations.

(b) Policy myopia

 Critics of government intervention in the economy argue that politicians have a

tendency to look for short term solutions or "quick fixes" to difficult economic

problems rather than making considered analysis of long term considerations.

 For example, a decision to build more roads and by-passes might simply add to the

problems of traffic congestion in the long run encouraging an increase in the total

number of cars on the roads.

 The risk is that myopic decision-making will only provide short term relief to

particular problems but does little to address structural economic problems.

 Critics of government subsidies to particular industries also claim that they distort

the proper functioning of markets and lead to inefficiencies in the economy. For

example short term financial support to coal producers to keep open loss-making

coal pits might prove to be a waste of scarce resources if the industry concerned has
 little realistic prospect of achieving a viable rate of return in the long run given the

strength of global competition.

(c) Regulatory Capture

 This is when the industries under the control of a regulatory body (i.e. a government

agency) appear to operate in favour of the vested interest of producers rather can

consumers

 Some economists argue that regulators can prevent the ability of the market to

operate freely. We might find examples of this in agriculture, telecommunications,

the main household utilities and in transport regulation.

 For example, to what extent has the system of agricultural support known as

the Common Agricultural Policy operated too much in the interests of farmers and

the farming industry in general? And as a result, has the CAP worked against the

long-term interest of consumers, the environment and developing countries who

claim that they are being unfairly treated in world markets by the effects of import

tariffs on food and export subsidies to loss-making European farmers?

(d) Disincentive effects

 Free market economists who fear government failure at every turn argue that

attempts to reduce income and wealth inequalities can

worsen incentives and productivity. They would argue against the National

Minimum Wage because they believe that it artificially raises wages above their

true free-market level and can lead to real-wage unemployment.

  They would argue against raising the higher rates of income tax because it is

deemed to have a negative effect on the incentives of wealth-creators in the economy

and generally acts as a disincentive to work longer hours or take a better paid job.

(e) Government intervention and evasion

 A decision by the government to raise taxes on de-merit goods such as cigarettes

might lead to an increase in attempted tax avoidance, tax evasion, smuggling and

the development of grey markets where trade takes place between consumers and

suppliers without paying tax

A decision to legalize and then tax some drugs might lead to a rapid expansion of the supply

of drugs and a substantial loss of social welfare arising from over consumption.

(f) Policy decisions based on imperfect information

 How does the government establish what citizens want it to do in their name? Can

the government ever really know the true revealed preferences of so many people?

 Often a government will choose to go ahead with a project or policy without having

the full amount of information required for a proper cost-benefit analysis. The result

can be misguided policies and damaging long-term consequences.

 How does the government know how many extra houses need to be built in the UK

over the next twenty years? Is building thousands of extra homes in an already

congested South-east the right option? Are there better solutions? There have been

plenty of instances of government housing policy having failed in previous decades!

(g) The Law of Unintended Consequences

 The law of unintended consequences is that actions of consumer and producers —

and especially of government—always have effects that are unanticipated or

"unintended." Particularly when people do not always act in the way that the

economics textbooks would predict

 The law of unintended consequences is often used to criticise the effects of

government legislation, taxation and regulation. People find ways to circumvent

laws; shadow markets develop to undermine an official policy; people act in

unexpected ways because of ignorance and / or error. Unintended consequences can

add hugely to the financial costs of some government programmes so that they make

them extremely expensive when set against their original goals and objectives.

(h) Costs of administration and enforcement

Government intervention can prove costly to administer and enforce. The estimated social

benefits of a particular policy might be largely swamped by the administrative costs of

introducing it.

Key points about government failure

1. Free market economists are distrustful of intervention. They believe that the price

mechanism should be given freedom to operate

2. Often we can accuse the government of policy failure only with the benefit of

hindsight
 3. Limited information - no government has the resources and information available

to it to make fully-informed, objective judgements. That is the nature of politics.

4. Government failure is most likely to occur when decisions are made in the vested

interest of special interest groups, at the expense of other groups (the result is

a loss of equity)

Government failure

Government intervention to resolve market failures can also fail to achieve a socially

efficient allocation of resources. Government failure is a situation where government

intervention in the economy to correct a market failure creates inefficiency and leads to a

misallocation of scarce resources.

Examples of government failure include:

1. Government can award subsidies to firms, but this may protect inefficient firms from

competition and create barriers to entry for new firms because prices are kept

‘artificially’ low. Subsidies, and other assistance, can lead to the problem of moral

hazard.

2. Taxes on goods and services can raise prices artificially and distort the efficient

operation of the market. In addition, taxes on incomes can create a disincentive

effect and discourage individuals from working hard.

3. Governments can also fix prices, such as minimum and maximum prices, but this

can create distortions which lead to:

 Shortages, which may arise when government fixes price below the market rate.

Because public healthcare is provide free at the point of consumption there will be long

waiting lists for treatment.

 Surpluses, which may arise when government fixes prices above the natural market

rate, as supply will exceed demand. For example, guaranteeing farmers a high price

encourages over-production and wasteful surpluses. Setting a ‘minimum wage’ is likely to

create an excess of supply of labour in markets where the ‘market clearing equilibrium’ is

less than the minimum.

4. Information failure is also an issue for governments, given that government does not

necessarily ‘know’ enough to enable it to make effective decisions about the best

way to allocate scarce resources. Many economists believe in the efficient market

hypothesis, which assumes that the market will always contain more information

than any individual or government. The implication is that market prices and market

movements should be free from interference because markets cannot be improved

upon by individuals or governments.

5. Excessive bureaucracy is also a potential government failure. This is caused by the

public sector when it tries to solve the principal-agent problem. Government must

appoint bureaucrats to ensure that its objectives are pursued by the managers of

public sector organisations, such as the NHS.

6. Finally, there is the problem of moral hazard associated with the payment of welfare

benefits. If individuals know that the state will provide unemployment benefit, or

free treatment for their poor health, they are less likely to take steps to improve their
 employability, or to avoid activities which prevent poor health, such smoking, a poor

diet, or lack of exercise.

What are the causes of government failure?

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4 Answers

Dennis Pratt, 40 years studying a loving, peaceful, voluntary life.

Updated May 23, 2018 · Author has 1k answers and 1.9m answer views

Government failure is an economic concept, similar to market failure, but arguably more

ubiquitous and more damaging. Government failure occurs when a ruler forces people to do
things that the people are otherwise unwilling to do and the result is inefficient and

ineffective.

Causes of government failure include:

Economic Calculation Problem: The more government is involved, the more actual costs

and actual demand is hidden. In a free market, price signals relative supply and demand,

allowing actors to make efficient choices without having perfect knowledge. Government

gives “services” at reduced price to the user: unrestrained by price, demand is always

higher. Government buys services from politically connected companies, making price of

supplies less impactful.

 Examples: Bread lines, shoe shortages, steel shortages, DMV lines.

Tragedy of the Commons: Anything owned by the government has a tendency to be

overused and under serviced. Private ownership will protect the asset better and will manage

its use better.

 Examples: air pollution; water pollution; Boston Commons; NY City parks;

(Interestingly, government itself is an example of tragedy of the commons. Government, as

a common resource, gets overused by various interest groups for transfer payments,

insurance, regulations, etc.)

Ruler’s short-term ownership Rulers are different from private owners in that they control

the public property only for the duration of their rule, then they must relinquish all control

and benefit. Unlike private owners, rulers do not benefit from long-term investment in what
they (temporarily) own. A utility maximizing ruler will focus policy and resources primarily

on gaming the next election cycle.

 Example: A tract of land could be used to grow tree A or tree B. Tree A will

take 25 years to harvest, but the value is 10 times greater than Tree B, which could

be harvested within 10 years. The ruler chooses Tree B because he can harvest the

tree and use its proceeds before he loses his temporary ownership of the land. The

private owner chooses Tree A because, he (or his children) can directly reap the

benefit, by waiting long enough to harvest it themselves or by selling off the land

with the trees.

Risk-free lying. Rulers can assert that they are protecting our future. However, any lies

have about zero consequence to the ruler: politicians are not held accountable for what they

say, and/or the ruler will have left office before the long-term arrives.

 Example: A politician promises that his program will reduce costs and improve

services in 10 years. The program turns out to do neither, but the politician is

already out of office and he benefits in that his political opponent must pick up the

pieces of his lie. In the free market, assurances would be sought, insurance

bought, legal judgements could be acquired, compensation paid, and buyers would

be generally more prepared to “beware”.

Risk aversion. Rulers are unusually risk averse, thus innovation largely stops with

government. Innovation rocks boats. The long-term consequences may well be fantastic, but

the people in the current boats are quite sensitive to any rocking and are in a position to

apply political pressure, whereas beneficiaries of an innovation do not yet exist.

  Example: A new drug has only two outcomes: it could save 100,000

people/year or it could kill 60,000 people/year. A risk neutral solution would be to

permit the drug (a net expected savings of 40,000 people/year). However, the ruler

would be particularly sensitive to negative press of people dying from the drug

he approved. That 100,000 people/year who would die without the drug are not

attributed to him; he can ignore them. It is an acceptable price for the dying to pay

so that the ruler will not having angry families at his door; he disapproves the

drug, condemning 40,000 more people a year to their deaths.

Invisible Beneficiaries: Rulers will appease smaller, current constituencies rather than

larger, future constituencies.

 Example: A new industry will produce 5M jobs a year. It will obsolete an old

industry, which currently employs 2M. The current employees have a powerful

lobbying group. The new industry has no employees, let alone a lobbying group.

The ruler uses the violence of laws to hamstring the new industry and to prop up

the old industry, earning votes and retaining power.

Concentrated Benefits vs. Dispersed Costs: Lobbyists who can get large benefits from

rulers have a high incentive to lobby. If the cost is spread out thinly to a large group of

people, those adversely affected will have little incentive to lobby. The decision will then be

made in favor of the concentrated group.

 Example: A teachers’ union proposes a salary increase of $10K per teacher. The

cost to taxpayers is only about $20/year. Each teacher is highly motivated by that

$10K increase, whereas each taxpayer, even though there are more of them, won’t

bother fighting too hard to save their $20. Teachers attend every hearing, holding
 signs, chanting, giving press interviews, taking politicians and bureaucrats out to

dinners, and inviting them to speak. The rulers approve the salary increase for the

concentrated benefit of the small interest group.

Campaign Contributions: The concentrated benefits vs. disbursed costs can translate into

direct payoffs to politicians. The recipient of the benefit is in effect kicking back part of the

ruler’s transfer payment from the taxpayers to the interest group.

 Example: A taxi company is anxious about a new competitor that undercuts its

prices. It contributes $100,000 to a politician whose “Get Tough On Standards”

regulations will put the new service out of business.

 Example: A construction company contributes to a politician promising to

improve infrastructure. Its investment of a $100,000 to the politician is more than

returned with a $5.3M contract.

Regulatory Capture: The people whom the government is regulating exert enormous

“assistance” in commenting, testifying, helping, advising, and writing the legislation and

regulation. The resultant rules give them legitimized violent power over competitors,

potential entrants, and customers.

Omniscience/Prescience: Economists posit that government can correct “market failures”

because they assume the rulers will have the perfect omniscience and prescience necessary

to make the correct economic decisions. However, politicians and bureaucrats have neither

omniscience nor prescience, so it is unlikely they can make that perfect decision.

Incentive Problem: While “market failure” may occur because individual actors are locally

maximizing their own utility, economists curiously assume that rulers will act differently —
altruistically — for “the good of society”. However, rulers are at least as likely to act in their

own local self interest, so this assumption is false. A ruler, acting in his local special

interest, but having the force of law’s violence behind him, creates much more destruction

of both efficiency and effectiveness.

Democratic voting. Democratically electing a wise and benevolent ruler is a public good (a

good whose benefit is shared with everyone, regardless of any one person’s contribution to

its production.) It is expensive for the individual voter to learn the policies and character of

the politicians, their individual vote has infinitesmal individual impact on the outcome, and

there is no special benefit coming to them, so the voter has little incentive to do all that

work: rational ignorance is utility-maximizing for the individual. But as each voter

maximizes his own benefit by not doing the homework that allows him to choose “the best”,

we see government failure at the very core of selecting our rulers. Because of government

failure of democracy, the chosen ruler will never be “the best”; instead the decision will be

based on toupees versus pants suits.

Lack of feedback with threats of violence: Politics is one of the few domains where the

result is initiating violence against the unwilling. In freed markets, one can tell the degree to

which your idea is good versus bad by the number of people who buy it. In political market,

you get no such feedback. The threat of violence that lies behind every law and regulation

forces people who value their life to comply, regardless of whether the idea is beneficial or

not. The ruler can only see his idea “working”, not the resistance to it, and will often treat

any overt resistance as a new problem to be treated with yet another law (threat of violence).
Ethics: Economics is not an ethical system. Its measure of “goodness” is efficiency. It

would be as happy if we were slaves to our ruler, as long as we achieved full market

efficiency. However, humans are not just inputs to a central planner’s mathmatical model.

We have passions and interests and hobbies and quirks. Even if a ruler, with the authority to

own us, produced an efficient outcome — which he can not! — we still don’t want to be his

slaves. Threatening violence on otherwise peaceful people to force them to do what they are

unwilling to do is ethically evil, no matter what your (economic) goal is. Ethics is

government’s largest failure.

Government Failure

Definition of government failure:

This occurs when government intervention in the economy causes an inefficient allocation

of resources and a decline in economic welfare.

Often government failure arises from an attempt to solve market failure but creates a

different set of problems.

 Reasons for government failure

 Lack of incentives: In the public sector, there is limited or no profit motive.

Because workers and managers lack incentives to improve services and cut costs it can lead

to inefficiency. For example, the public sector may be more prone to over-staffing. The

government may be reluctant to make people redundant because of the political costs

associated with unemployment.

 Poor information, politicians may have poor information about the type of service

to provide. Politicians may not be experts in their department but concentrate on their

political ideology.
 Political interference Decisions made for short-term political gain – rather than

sound economics, e.g. keep on unproductive workers. e.g. politicians may take the short-

term view rather than considering the long-term effects

 No consistency. Change of government often leads to change of approach and new

political initiatives

 Moral hazard. The government may offer a guarantee to all bank deposits to protect

the financial system, but this could encourage banks to take risks – because they know they

can be bailed out by the government.

 Regulatory capture – When government agencies become too friendly with

business/groups they are trying to regulate

 Unintended consequences. Policies to reduce relative poverty ‘means-tested

benefits’ can create ‘welfare dependency.’ For those on means-tested benefits, moving from

benefits to work could lead to very little extra income because of lost benefits and higher

taxes. Benefits can then solve one problem of relative poverty but create new problems of

higher spending and lower levels of labour market participation.

 Special interest groups. In the US, many types of business have special tax credits

for their industry; this makes it difficult to reform the tax system, and leads to horizontal

inequality – business with same income can be treated differently. In the Europe, farmers

receive substantial financial support from the EU, making it difficult to reform CAP. Once

people are used to receiving subsidies it can be politically difficult for the government to

take it away.

 White elephant projects. Concorde supersonic airliner was a joint venture between

British and French government. It was seen as a prestigious venture, so even when studies
 suggested it was uneconomic, politicians didn’t want to back-track but kept putting in public

money. Developing Concorde cost the British and French governments £1.1 billion (about

£11 billion in 2003 prices) before it even went into service—nearly ten times what was

budgeted. (Economist)

 Tax leads to fly-tipping. A tax on rubbish is a policy to overcome market failure.

To try and include the external cost of rubbish in the price. However, a tax on rubbish can

lead to illegal dumping of rubbish on the roads. This creates a different problem of fly-

tipping.

 Common Agricultural Policy. The CAP was intended to solve market failure in

agriculture and protect farmers incomes, but the EU didn’t take into account minimum

prices would lead to over-supply; there were also unintended consequences of trade wars

and environmental problems from farmers trying to supply as much as they could.

See: CAP.

 Prohibition strengthened the mafia. When the government banned alcohol in the

US, it caused the mafia to supply alcohol, leading to a rise in organised crime.

Overcoming government failure

There are various things the government can try and do to overcome government failure

 Give performance targets/profit incentives

 Competitive tendering – where public sector bodies face competition from the

private sector for the right to run a public service.

 Employing outside private sector consultants to make decisions about how to cut

costs.
 Delegating certain decisions to non-political bodies. For example, setting interest

rates was given to the Bank of England as politicians often set interest rates for political

reasons.

 See also: How to overcome government failure

Evaluation of government failure

It should be remembered many public services are not subject to the same profit goals. It is

difficult to give a profit motive in health or education because the goal is not profit but the

quality of service.

Also, although government failure is a real issue, it is often much less than the problems

arising from market failure. Just because government intervention may be inefficient,

doesn’t mean we should try to tackle problems of pollution e.t.c.

How can the government avoid public sector failure?

 Tejvan Pettinger February 21, 2017  economics

Readers Question: how can the government avoid public sector failure?

Firstly, it makes a change to consider a question like this. Usually, the question is – Why is

the government inefficient? Why do we get government failure? Should we privatise public

services? But, here we can examine whether the tendency to government failure can be

overcome.
 Public sector failure/government failure

Public sector failure occurs when government intervention in the economy leads to an

inefficient allocation of resources and leads to an overall decline in economic welfare.

Government failure can occur for various reasons, such as.

 Lack of profit incentive in the public sector. People working for the government may

not have the same profit motive to cut costs / work hard/ increase efficiency. Therefore, this

causes the government sector to be inefficient compared to the private sector.

 Greater bureaucracy in public sector.

 The conflict between political and economic objectives.

How can the government avoid public sector failure?

1. Introduce profit incentives/performance targets into the government sector.

There is no reason why those working in the public sector can’t be given performance

targets. For example, schools can be given targets to achieve minimum exam standards and

climb up the league tables of exam performance. People working in the public sector can be

paid piecemeal – rather than per hour. For example, rather than pay refuse collectors £8.00

an hour. They could be paid £64 a day to do a job estimated to take 8 hours. This gives them

an incentive to work faster and not dawdle on the job.

Evaluation. It can be difficult to introduce the profit motive into many areas of the public

sector. For example, education and healthcare do not lend themselves so well to

performance targets and profit motives. Schools which target better exam results may do so
 at the cost of excluding less intelligent pupils. They may sacrifice other aspects of an all-

rounded education to get better exam results. Managers in a hospital may be able to cut

costs, but the consequence may be to put greater pressure on nurses and doctors – it may

compromise the standards of health care.

The problem is that the government tends to get involved in public services which are either

not provided by the free market or are under-provided (e.g. merit goods and public goods).

The problem of these public services is that they are not natural profit oriented industries.

2. Competition

One thing the Conservative government did in the 1980s was to introduce competitive

tendering for many public services. This meant local councils lost their monopoly provision

of public services, such as school meals and refuse collection. Council services could still

bid to run refuse collection. But, if a private company offered a better service, then they

would lose out to the private sector. The argument is that the threat of competition creates

incentives for the public sector to act like a private company and cut costs.

 Evaluation. The problem with competitive tendering is that the cheapest service

may not be the best.  A private company may offer to provide school meals for a cheap cost

but at the expense of reducing the quality of food. Therefore, you reduce costs, but you have

a decline in standards. A government body then needs to be responsible for checking

standards of service.
Many public services are natural monopolies, therefore, competition is hard to introduce. If

you get the right to run a refuse collection for five years, a private company effectively has a

private monopoly for five years.

In the 1980s, public bus companies lost their legal monopoly and competition was

introduced, with private companies such as Stagecoach entering the market. However, this

means that there is often an overlap and duplication of bus services, leading to increased

congestion. Also, with private companies, fare increases lead to higher profit for private

companies, rather than benefiting the local council.

3. Public-private partnerships

Another policy is to try and encourage public-private partnerships. This means that for a

project, the government try to involve the private sector. The private sector pays part of the

cost and brings expertise and the incentives of the private sector into the project.

The downside is that private companies tend to cherry-pick projects. They benefit from

government investment, but they get the profit rather than the government.

4. Rely on good-will

Some public services are sectors of the economy where the usual profit motivate is not all

dominant. For example, most doctors, nurses and healthcare workers choose their profession

– not to maximise earnings but to gain satisfaction from serving patients. What healthcare

professionals need is not performance related pay, but working conditions conducive to

good morale. If staff are overworked or have too much paperwork – this can lead to poor

morale. Reducing bureaucracy and creating a well-funded health care system is a powerful
way to get the most from government funds. It is a similar situation in education, with many

teachers over-worked from filling in forms.

Government Failure

Governments are a necessary part of any society to lay down a

foundation of rules and laws, to correct negative externalities,

and to provide public goods. Most people consider democracy

to be the ideal form of government, because they can choose

representatives who, they think, will serve their best interest.

However, in many cases, even democratic governments do not

 often act in the best interests of the people who elected them.

Several major factors cause this government failure:

 the influence of special interests and rent-seeking parties,

 the concern of most politicians of their re-election

prospects over the best interest of the economy,

 choices limited to 2 viable parties who often serve

special interests, and

 the inefficiency of bureaucracy.

Special Interests

The primary cause of government failure is special interests,

people who are highly concerned about a particular aspect of

the law or government policies, such as the concern of the

wealthy and businesses about taxation, or the concern by the

National Rifle Association about laws regulating firearms.

Special interest groups influence politicians in several ways.

Because of their knowledge about particular topics and

because of their motivation to have things their way, they

spend an inordinate amount of time and money trying to

influence politicians to vote their way. Because politicians

constantly need money for reelection campaigns, special

interests are especially effective when they offer campaign

contributions to cooperative politicians.

Special-interest legislation is always against the public

interest, since if it was for the public interest, then the special

interests would not have to do anything special, since

legislators would simply be voting in the best interest of the

people. However, since special interests profit at the expense

of society, they bribe the politicians to vote their way. Most

politicians succumb to special interests because, although the

object of special interests may be at odds with the rest of

society, most people do not care sufficiently or even know

about the drawbacks of special-interest legislation. Hence,

politicians have little to fear by voting with the special-

interests.

Pork barrel politics refers to a particular type of special

interest in which legislators try to get projects approved for

their own individual districts. The primary characteristic of

pork is that no federal agency or the White House has

requested funds for the pork project; instead, the project is

financed by a line item addition to an appropriation bill by a

member of Congress who wishes to reward certain individuals

or organizations within his district. Because it is a line item

appropriation, it is not subject to congressional hearings.

Usually, members of Congress who have the most power get

the most pork projects funded. However, both Republican and

Democratic parties use pork projects to help reelect new

members of Congress.

In 2007, $18.3 billion was spent for almost 13,000 projects.

Only 18 lawmakers out of over 500 did not

seek earmarks (funding for special pet projects) for their

district.

Rent-seeking is the procurement of government favors so that

a business, industry, or labor unioncan earn higher profits than

would be possible under a competitive market. Other

examples of special interests include tariffs on imported

products, so that affected domestic industries can remain

competitive or earn higher profits; tax breaks that benefit

specific individuals, such as allowing hedge fund managers,

some who make hundreds of millions of dollars per year, to

categorize their wages as carried interest, for which they do

not have pay payroll taxes; rules that require government

financed projects to use labor unions; occupational

licensing that is more stringent than required for public safety;

and large subsidies to specific groups, such as farmers, some

who are large corporations that make millions of dollars per

year in profits.
Favoring Projects with Current Visible Benefits but Hidden or Future Costs

Because of their obsession with being reelected, politicians

are inclined to choose projects that have highly visible current

benefits but whose costs are not widely known or will only be

paid sometime in the future, even if those costs exceed the

benefits they provide. Conversely, they will reject projects

that have future benefits but visible current costs, even if the

future benefits are much greater than the current costs.

Because most politicians only remain in office for a limited

time, they care more about present benefits and less about

future costs. After all, when costs become payable, they may

be out of office; even if they are not, the electorate often

forgets about issues of the past.

Limited Choices

In the United States, American voters have 2 viable choices:

the Democratic Party or the Republican Party. Both of these

parties are influenced by special interest groups. The

Democrats are heavily influenced by unions and lawyers,

while the Republicans are heavily influenced by wealthy

people and big businesses. Hence, the voter is reduced to

choosing the lesser of 2 evils.

Legislative Process

Another major cause of government failure is the legislative

process itself, since it allows legislators to insert preferential

items into large complex bills where other representatives are

forced to either vote for or against the bill as a whole — they

have no line-item veto. This is the means of getting pork

barrel projects financed. Legislators cannot approve the bill

without also approving the line items, so if the overall bill is

desirable, then legislators will probably approve the bill in

spite of the objectionable line items.

Bureaucracy Inefficiency and Corruption

A private enterprise must be efficient; otherwise, it may go

bankrupt or its profits may be small. However, public

agencies do not have to concern themselves with viability or

profitability, and since most of them are paid by the hour, they

have little interest in efficiency. To make matters worse, many

public employees are represented by unions, whose objective

is to preserve jobs and to prevent the firing of its people. So

public employees are not too concerned about losing their job,

either, since there is little chance of that. Unions generally

oppose automation, since it reduces jobs, even though it will

save taxpayers money. Furthermore, public employees rarely

 concern themselves with costs. After all, who has not heard of

the $600 toilet seats purchased by the Pentagon.

Many, if not most, governments of the world are characterized

as corrupt because many public employees seek bribes to do

their jobs. Complex rules and regulations require the assent of

numerous government agencies before anything can be done,

so, because of their monopoly position created by law, they

can dillydally until the taxpayer pays an additional sum to

expedite service. For instance, before a restaurant can open in

most places, it needs a license. Public employees can delay the

granting of the license until the restaurateur pays a bribe;

otherwise, the restaurant may not open to conduct business.

n this research paper, Paul C. Light writes that the “first step in preventing future failures is

to find a reasonable set of past failures that might yield lessons for repair.” To meet this

goal, Light asks four key questions about past federal government failures: (1) where did

government fail, (2) why did government fail, (3) who caused the failures, and (4) what can

be done to fix the underlying problems?

 WHERE GOVERNMENT FAILED

To answer the first question, Light identified and ranked 41 important past government

failures (between 2001 – 2014) from a search of news stories listed in the Pew Research

Center’s “News Interest Index.” 

View our interactive on Government’s Most Visible Failures, 2001-2014 »

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Light finds the following patterns and characteristics in the dataset of significant

government failures:

1. Most of the failures involved errors of omission, not commission.

2. Some failures were obviously more visible than others.

3. Vision with execution is the clear driver of success, just as its absence is an equation

for failure.

4. Some of the stories contained elements of both success and failure.

5. The number of government failures has increased over time

Nonresident Senior Fellow -Governance Studies

6. There are differences between the five presidents in office during the failures.

Government had four failures during Reagan’s final two-and-a-half years (1.6 per year), five

during George H. W. Bush’s four years (1.2 per year), 14 during Clinton’s eight years (1.8

per year), 25 during George W. Bush’s eight years (3.1 per year), and 16 during Obama’s

first five-and-a-half years (2.9 per year).

7. The differences are just large enough to suggest that government may be somewhat

more likely to fail during the last few years of a two-term presidency, perhaps because
 presidents start to lose focus, appointees begin to turn over, the other party becomes more

assertive, and the media becomes more aggressive.

8. Government had just 10 failures during the Bush administration’s first term (2.5 per

year), but 15 failures during the administration’s second (3.8 per year). In turn, government

had just eight failures during the Obama administration’s first term (2.0 per year), but

matched its entire first-term total in just eighteen months of the second (5.3 per year).

9. These failures involved both oversight and operations.

10. More of the post-2001 government failures occurred during steady demand (27) than

during surging demand (14), perhaps confirming the unconventional notion that surges

sharpen organizational acuity.

WHY GOVERNMENT FAILED

Government can fail for many reasons, writes Light, including some that are well beyond its

control. Poorly designed policies come from Congress and the president, for example, and

may be impossible to implement regardless of bureaucratic commitment.

The contributors to failure fall into five categories, Light concludes:

1. Policy: Government might not have been given the policy, or any policy at all,

needed to solve the problem at hand; or the policy might have been either too difficult to

deliver or delegated to a vulnerable or historically unreliable organization.

2. Resources: Government might not have had enough funding, staff, or the “collateral

capacity” such as information technology, oversight systems, or technical experience to

deliver consistent policy impact.

3. Structure: Government might have been unable to move information up and down

its over-layered chain of command, select and supervise its contractors, or resolve the

confusion associated with duplication and overlap.

4. Leadership: Government’s top appointees might have been unqualified to lead;

could have made poor decisions before, during, and after the failures appeared; or might

have taken their posts after long delays created by the presidential appointments process.

5. Culture: Government might have created confusing missions that could not be

communicated and embraced, were easily undermined by rank corruption and unethical

conduct, or were beyond careful monitoring through performance measurement and

management.

WHAT CONGRESS AND THE PRESIDENT CAN DO

What can the president and Congress do to avoid future cascades of failure? Light argues

government actors must:

1. Think about policy effectiveness from the start

2. Provide the funding, staff, and collateral capacity to succeed

3. Flatten the chain of command and cut the bloat

4. Select presidential appointees for their effectiveness, not connections

5. Sharpen the mission

The most powerful incentive for action could be, Light asserts, the delivery grades outlined

above, especially if a failing grade came with a full stop on a prized proposal. Tied by rule

to an automatic return-to-sender motion, these assessments could prompt Congress and the

president to devote more attention to the intersection between vision and delivery. 

GOVERNMENT FAILURES:

Inefficiencies in the allocation of resources attributable to imperfections in the operation of

governments. Government failures are based on the utility-maximizing behavior of

politicians, voters, nonvoters, special interest groups, and government employees. The

identification and analysis of government failures is central to the study of public choice and

offers something of a counterbalance to government actions designed to address the

inefficiencies of market failures.

Governments -- state, local, and federal -- are the institutions used by society to regulate and

control the economy. A primary reason for the very existence of governments is to address

the resource allocation inefficiencies created by market failures. However, in an application

of the fifth rule of imperfection, government actions generate their own set of inefficiencies.

Government failures fall into four main categories: (1) election-seeking politicians, (2)

voters (and nonvoters), (3) special interest groups, and (4) bureaucracies and government
employees. Inefficiencies arise because politicians, voters, and government employees seek

to maximize their individual utilities, actions which do not necessarily lead to the

maximization of society's overall well-being.

A Word on Public Choice

Government failures are central to the study of public choice. Public choice is the economic

study of joint decisions such as those typically made by voters, government agencies, and

political leaders. This study is based on the application of standard utility-maximizing

behavior to decision making in the political arena. People not only maximize utility when

buying products, but also when voting in elections. Politicians maximize utility when

running for office. Government workers maximize utility when implementing government

policies. This pursuit of individual satisfaction by players of the political game often

conflicts with the general well-being of society.

The Fifth Rule of Imperfection

Mistakes happen. People are not perfect. People run government. People make public

choices. People vote. People are elected to government office. People implement

government policies.

And people are not perfect. Neither is government. This notion is captured by the fifth rule

of imperfection. The fifth rule of imperfection (the fifth of seven basic rules of the

economy) is the observation that the real world is not perfect, that both markets and

governments can fail to achieve efficiency.

Government actions are often aimed at correcting the inefficiency failings of the market.

Markets fail due to public goods, market control, externalities, and imperfect information.
Governments intervene in the economy with the goal of correcting these failings and

achieving efficiency.

However, government intervention is also imperfect and inefficient. The actions needed to

correct market failures might not be implemented correctly or effectively. For example,

government might intervene to correct the imperfection of market control only to increase

market control and the resulting inefficiency.

Sources of Government Failure

Public choice is the study of government decisions and how those decisions can be

imperfect and inefficient. These efficiency problems can be attributed to four different

players in the political game -- politicians, voters, interest groups, and bureaucracies.

 Politicians: These are members of society who seek elected offices. Problems and

inefficiencies arise because politicians, like all human beings, seek to maximize their

own utility. This pursuit can and does conflict with doing what's best for the

economy. Elected politicians often fall victim to the principal-agent problem.

 Voters: People, citizens of a nation, also seek to maximize their own utility. Two

rational choices they make in this pursuit are to NOT be informed (rational

ignorance) and to NOT participate in the political process (rational abstention). Such

"apathy" means that elected leaders can ignore their preferences.

  Interest Groups: While some people have little or no involvement in the political

process, others have a great deal of involvement. These people, who also seek to

maximize utility, have more to gain or lose from particular government actions and

are thus motivated to act accordingly, usually by forming special interest groups.

 Bureaucracies: Government policies are usually implemented by complex

organizations. Those who work in these bureaucracies are also, you guessed it,

utility maximizers. Their pursuit of utility can and does conflict with the efficient

implementation of government policies.

Market Failures

Analysis of government failures is often undertaken as a counter to market failures. Market

failures occur when markets do not efficiently allocate resources in a manner that achieves

the greatest possible level of satisfaction. These failures prompt government intervention in

the economy. Market failures come in four varieties.

 Public Good: A public good is a good that can be consumed simultaneously by a

large number of people without the consumption by one imposing an opportunity

cost on others. This is the primary reason for many government functions, especially

common defense and public health.

 Market Control: Market control arises when buyers or sellers are able to exert

influence over the price of a good and/or the quantity exchanged.

 Externality: An externality exists if the market price does not include all benefits and

costs of producing, consuming, and exchanging a good.

 Imperfection Information: The lack of information among buyers or sellers often

means that the market price does not fully reflect all benefits or opportunity costs of

producing, consuming, and exchanging a good.

With each of these failures, market exchanges do not achieve

an efficient allocation of resources indicated by an equality

between the value of goods produced and the value of goods

not produced. Often the inequality is indicated by an

inequality between the demand price and supply price in a

market, as with market control. In other cases the inequality

results because markets are not even available to exchange

goods, such as the public goods of common defense or public

health. In still other cases markets do not fully capture the

value of goods produce and not produced in the demand and

supply prices, seen with externalities and imperfect

information.
Government Failure

1. 1. Government FailureAS Microeconomics

2. 2. Intervention in the market-placeGovernment intervention• Markets fail and the

governmentintervenes - but there is always the riskof government or regulatory

failure!

3. 3. What is government failure?• Government failure occurs when a

policyintervention leads to a deepening of the marketfailure or even worse a new

failure may arise• In other words – intervention creates furtherinefficiencies and a

loss of welfare• (1) Policies may have damaging long termconsequences for the

economy or society• (2) Policies may be ineffective in meeting aims• (3) Policies

may create more losers than winners

4. 4. Some causes of government failure1. Decisions made because of political self

interest2. Low value for money from public sector investment3. Policy short-

termism4. Regulatory capture5. Disincentives arising from specific policies6.

Information failures at government level7. The “law of unintended consequences”8.

The costs of regulation may outweigh the benefits

5. 5. Self interest• Government may beinfluenced by lobbyingfrom interest groups•

Examples?– Farm support policies– Reaction to swine flu risks– Government

failures toreform the banking system– Transport investment (powerof the road / air

lobby)– Caps on inward migration

6. 6. Value for money issues• What is the social benefit of public sector spending?• Is

the government getting value for money?• Good grounds for thinking that public
 goods can beprovided efficiently – e.g. Economies of scale• But there are risks1.

Over-staffing in public sector industries2. Relatively low productivity compared to

market sector3. Excessive costs of bureaucracy• Note though – waste is not the

preserve ofgovernment – there are plenty of examples of privatesector waste

7. 7. Value for money is a key issueValue for money is a crucial issue when

discussinggovernment spending - many projects utilise economies ofscale but there

may be inefficiencies too

8. 8. More value for money issuesThe costs of public sector investment projects often

over-runAnd many interventions do not meet set targets

9. 9. Policy myopia and quick-fixes• Politicians have a tendency to look for short

termsolutions or “quick fixes” to problems• They favour short term initiatives rather

than fullythought-through policies for the long term• Examples?– Road widening to

cut traffic congestion– ASBOs for young offenders– Offering surgery on the NHS to

combat obesity– Zero-tolerance and visible anti-crime measures like CCTV

10. 10. Legislative diarrhoea?Government is less responsive than market signalsToo

much legislation creates extra costs and uncertainty

11. 11. Regulatory capture• This is when the industriesunder the control of agovernment

agency appearto operate in favour of thevested interest of producersrather can

consumers• Examples:– Allowing self-regulation onalcohol prices– Over-supply of

C02 emissionspermits to industries as part ofthe EU emissions tradingscheme

12. 12. Does red tape strangle efficiency & enterprise?

13. 13. Disincentives• Where policy interventions lead to a loss of incentives eitherfor

consumers or producers• Free market economists argue that attempts to

 redistributeincome and & wealth can damage work incentives• Examples:– Higher

rates of income tax?– The poverty trap facing low income familiesGovernment

failure can happen if a policy decision fails tocreate enough of an incentive to

change behaviour

14. 14. Information failures• Has there been governmentpolicy failure over swine flu?•

In the emergency last summerthe government contracted tobuy 120 million jabs

from thetwo manufacturers, GlaxoSmithKline and Baxter, but thenreduced the order

to just 44million as the emergency peteredout. Only 6million of those haveactually

been used, nearly 4million are being given to theWorld Health Organisation foruse

in Africa, leaving 34 millionon the shelf.

15. 15. Law of unintended consequences• Policy interventions have effects that

areunanticipated or unintended. Particularly whenpeople do not act in the way that

the economicstextbooks would predict• Remember – economics is a social science!•

Well-intentioned legislation often act against theinterests of those it is intended to

serveThis law is crucial to understanding government failure – notall of the

unintended consequences are negative!

16. 16. Negative unintended consequences• Higher capital gains tax – reduces new

house building -worsens housing shortages /affordability• Bank bail-outs – raises the

problem of moral hazard• Bio-fuel subsidy – causes food price inflation and hits

thepoorest in society• Smoking ban – increases demand for and use of

energyinefficient patio-heaters• Windfall tax on North Sea oil and gas companies led

to ahuge fall in investment and exploration – just yearsbefore oil prices surged•
 Tariffs on steel – hits domestic car and construction firms• Targets for treating

patients – leads to reduction in thequality of care e.g. Staffordshire General scandal

17. 17. Unintended consequences

18. 18. Providing health care• “20% of visits to GPs arefor coughs and commoncolds.

This costs the NHS£2bn a year, withoutmaking any difference topeople’s health.

The NHShas become a victim ofdemand-led culture….£10 per visit should

beenough to deter peoplewith sniffles.”Incentives?“In Dundee, smokers are

beingoffered £12.50 a week by the NHS ifcarbon monoxide testing shows theyhave

quit. In Essex, pregnant womencan claim a £20 food voucher fromthe NHS after

stopping smoking forone week, £40 after four weeks andanother £40 at the end of a

year ifthey have still quit. Brighton offerschildren £15 for quitting smoking for28

days, while overweight patients inKent are also being offered incentivesfor losing

weight.”

19. 19. A bright idea?• In 2008 the Government orderedthe big energy companies

toinvest in measures for improvingenergy efficiency and cutting fuelpoverty.• The

result is that 12 million low-energy light bulbs were posted tohouseholds over

Christmas by anenergy company as part of itslegal obligation to cut

carbonemissions, despite governmentadvice that many would never beused. Over

180 million light bulbshave been issued most aregathering dust in our drawers.

20. 20. Market forces?• Many questions refer to the ongoing debate aboutfree market

forces versus government intervention• Markets are hugely powerful:– As drivers of

innovation– In finding solutions to long term problems• The price mechanism

performs several key functions– Rationing– Allocation– Signalling• Smart

 interventions can enhance the market, poorly-judged interventions can make things

much worse

21. 21. Tutor2uKeep up-to-date with economics,resources, quizzes andworksheets for

your economicscourse.
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