How can the government avoid government failure?...............................................................................2
Subsidy.....................................................................................................................................................3
Agriculture market...................................................................................................................................4
Common Agricultural Policy (CAP) (buffer stock – guaranteed min. price).............................................................5
CAP reform (guaranteed income)..........................................................................................................................5
Tariffs on imports...................................................................................................................................................6
Indirect tax...............................................................................................................................................6
Price controls – min and max prices..........................................................................................................7
Minimum prices.....................................................................................................................................................7
Maximum prices....................................................................................................................................................8
Minimum alcohol pricing..........................................................................................................................8
National Minimum Wage (min price)......................................................................................................11
New ‘sugar tax’ on unhealthy foods........................................................................................................12
Increasing the rate of VAT......................................................................................................................15
Decrease in corporation tax....................................................................................................................17
Trade unions (perfectly competitive markets).........................................................................................21
Regulation..............................................................................................................................................23
Gambling.............................................................................................................................................................23
Alcohol.................................................................................................................................................................23
Obesity................................................................................................................................................................24
Smoking...............................................................................................................................................................25
Nudges...................................................................................................................................................25
Information provision.............................................................................................................................26
Legalising cannabis.................................................................................................................................26
Factory emission environmental failure government intervention..........................................................27
Tradable pollution permits..................................................................................................................................27
Enforcement of property rights............................................................................................................................28
Landfill tax, emissions tax and carbon tax (Pigouvian taxes)................................................................................28
Carbon tax...............................................................................................................................................................................28
Landfill tax...............................................................................................................................................................................29
Seattle Stomp.........................................................................................................................................................................29
Renewable Obligation Certificates.......................................................................................................................29
Car pollution government intervention...................................................................................................29
Congestion charge and ultra-low emission zone in central London......................................................................30
Fuel tax................................................................................................................................................................31
Subsidies to reduce the cost of public transport..................................................................................................31
Regulations..........................................................................................................................................................31
,Fishing environmental failure intervention.............................................................................................32
Fishing quotas......................................................................................................................................................32
Property right enforcement.................................................................................................................................32
Tougher regulation..............................................................................................................................................32
Subsidise fish farmers..........................................................................................................................................33
Plastic pollution environmental failure intervention...............................................................................34
Plastic bag charge/ tax to reduce single use bags.................................................................................................34
Information provision and regulation..................................................................................................................34
Subsidise free drinking water in cafes, restaurants, public spaces.......................................................................34
Automation............................................................................................................................................35
The gig economy.....................................................................................................................................36
Policies to increase labour market flexibility...........................................................................................38
Government intervention in a declining industry....................................................................................38
The housing markets..............................................................................................................................40
Government intervention in the housing market.....................................................................................41
Rent control.........................................................................................................................................................41
Subsidise building companies (for social housing)................................................................................................42
Help to buy scheme.............................................................................................................................................42
Regulation............................................................................................................................................................43
Tax breaks (for investors willing to make rented properties at affordable rents).................................................43
Policies to reduce income and wealth inequality.....................................................................................43
Should the government provide the good?.............................................................................................44
Nationalisation.......................................................................................................................................45
Broadband...........................................................................................................................................................46
Privatisation...........................................................................................................................................47
Train privatisation................................................................................................................................................48
How can the government avoid
government failure?
,Introduce profit incentives/ performance targets into the government sector
Schools can be given targets to achieve minimum exam standards and climb league tables
Evaluation
It can be difficult to introduce profit incentive due to their social aspect and may result in unintended
consequences like excluding less intelligent pupils and sacrifice other aspects of an all-round education to get
better exam results
Managers may be able to cut costs but at the consequence of additional pressures on nurses and doctors which
would compromise the standards of health care
They are not natural profit-oriented businesses
Encourage competition
Competitive tendering
Conservative government did this in the 1980s meaning local councils lost their monopoly provision of public
services like school meals and refuse collection
Council services could still bid to run refuse collection, but lost out to better competition from a private company
The threat of competition provides incentives to public sectors to act like a private company and cut costs
Evaluation
Cheapest services may not be the best
A private company may offer cheap goods at the expense of a reduction in quality and a government body must
be responsible for checking standards of service
Many public services are natural monopolies, so competition is hard to introduce
It could also decrease efficiency as it may lead to the duplication of services. This was during the 1980s when
public bus companies lost their legal monopoly and had to share services with private companies like Stagecoach
which increased congestion. Fare increases also led to higher profits for private companies instead of benefitting
the local council
Public private partnerships
This means that for projects, the government could try to involve the private sector. This means they pay part of
the cost and brings expertise and incentives for the private sector into the project.
Evaluation
Private companies tend to cherry pick projects that mean they get the profit rather than the government
Rely on good will
Some public sector services like education, the usual profit motive is not all dominant
Reducing bureaucracy and creating a well-funded service is a powerful way to get the most from government
funds
Employ outside private sector consultants to make decisions about how to cut costs
Delegate certain decisions to non-political bodies e.g. setting interest rates was given to the BoE as politicians
often set interest rates for political reasons. This meant they had political neutrality.
Subsidy
, Effects
Lower prices and quantity demanded increases
May be positive externalities and this may increase output to socially efficient levels
Help poorer families e.g. food and childcare costs
o Achieve a more equitable distribution of income
Encourage output and investment in fledgling sectors
Protect jobs in loss-making industries e.g. hit by recession
Make some health care treatments more affordable
Reduce the cost of training & employing workers
Reduce some external costs of transport + encourage arts and other cultural services
Lower costs of production – price decrease, quantity increase, solves underconsumption, allocative efficiency and welfare
gain
Depends on
Elasticity of demand
o Inelastic = larger effect on price
o Elastic = larger effect on output
Expensive
o Burden on taxpayer
o Other incentives may be needed
o Opportunity cost
o Reproductive debt?
Reduces incentives for firms to cut costs
o Should avoid subsidisation unless there’s a clear social benefit
o E.g. the temporary US agricultural subsidies have grown in cost and influence and proved very difficult to
remove
o May become dependent on state aid and financial assistance
o Time lags and long run effectiveness
Government failure and unintended consequences
Depends on how firms use the subsidy
Setting subsidy at the right level is hard
Agriculture market
Types of market failure in agriculture
1. Volatile prices/ supply
2. Low and volatile income for famers
3. Environmental costs of intensive farming (negative externalities)
Subsidy.....................................................................................................................................................3
Agriculture market...................................................................................................................................4
Common Agricultural Policy (CAP) (buffer stock – guaranteed min. price).............................................................5
CAP reform (guaranteed income)..........................................................................................................................5
Tariffs on imports...................................................................................................................................................6
Indirect tax...............................................................................................................................................6
Price controls – min and max prices..........................................................................................................7
Minimum prices.....................................................................................................................................................7
Maximum prices....................................................................................................................................................8
Minimum alcohol pricing..........................................................................................................................8
National Minimum Wage (min price)......................................................................................................11
New ‘sugar tax’ on unhealthy foods........................................................................................................12
Increasing the rate of VAT......................................................................................................................15
Decrease in corporation tax....................................................................................................................17
Trade unions (perfectly competitive markets).........................................................................................21
Regulation..............................................................................................................................................23
Gambling.............................................................................................................................................................23
Alcohol.................................................................................................................................................................23
Obesity................................................................................................................................................................24
Smoking...............................................................................................................................................................25
Nudges...................................................................................................................................................25
Information provision.............................................................................................................................26
Legalising cannabis.................................................................................................................................26
Factory emission environmental failure government intervention..........................................................27
Tradable pollution permits..................................................................................................................................27
Enforcement of property rights............................................................................................................................28
Landfill tax, emissions tax and carbon tax (Pigouvian taxes)................................................................................28
Carbon tax...............................................................................................................................................................................28
Landfill tax...............................................................................................................................................................................29
Seattle Stomp.........................................................................................................................................................................29
Renewable Obligation Certificates.......................................................................................................................29
Car pollution government intervention...................................................................................................29
Congestion charge and ultra-low emission zone in central London......................................................................30
Fuel tax................................................................................................................................................................31
Subsidies to reduce the cost of public transport..................................................................................................31
Regulations..........................................................................................................................................................31
,Fishing environmental failure intervention.............................................................................................32
Fishing quotas......................................................................................................................................................32
Property right enforcement.................................................................................................................................32
Tougher regulation..............................................................................................................................................32
Subsidise fish farmers..........................................................................................................................................33
Plastic pollution environmental failure intervention...............................................................................34
Plastic bag charge/ tax to reduce single use bags.................................................................................................34
Information provision and regulation..................................................................................................................34
Subsidise free drinking water in cafes, restaurants, public spaces.......................................................................34
Automation............................................................................................................................................35
The gig economy.....................................................................................................................................36
Policies to increase labour market flexibility...........................................................................................38
Government intervention in a declining industry....................................................................................38
The housing markets..............................................................................................................................40
Government intervention in the housing market.....................................................................................41
Rent control.........................................................................................................................................................41
Subsidise building companies (for social housing)................................................................................................42
Help to buy scheme.............................................................................................................................................42
Regulation............................................................................................................................................................43
Tax breaks (for investors willing to make rented properties at affordable rents).................................................43
Policies to reduce income and wealth inequality.....................................................................................43
Should the government provide the good?.............................................................................................44
Nationalisation.......................................................................................................................................45
Broadband...........................................................................................................................................................46
Privatisation...........................................................................................................................................47
Train privatisation................................................................................................................................................48
How can the government avoid
government failure?
,Introduce profit incentives/ performance targets into the government sector
Schools can be given targets to achieve minimum exam standards and climb league tables
Evaluation
It can be difficult to introduce profit incentive due to their social aspect and may result in unintended
consequences like excluding less intelligent pupils and sacrifice other aspects of an all-round education to get
better exam results
Managers may be able to cut costs but at the consequence of additional pressures on nurses and doctors which
would compromise the standards of health care
They are not natural profit-oriented businesses
Encourage competition
Competitive tendering
Conservative government did this in the 1980s meaning local councils lost their monopoly provision of public
services like school meals and refuse collection
Council services could still bid to run refuse collection, but lost out to better competition from a private company
The threat of competition provides incentives to public sectors to act like a private company and cut costs
Evaluation
Cheapest services may not be the best
A private company may offer cheap goods at the expense of a reduction in quality and a government body must
be responsible for checking standards of service
Many public services are natural monopolies, so competition is hard to introduce
It could also decrease efficiency as it may lead to the duplication of services. This was during the 1980s when
public bus companies lost their legal monopoly and had to share services with private companies like Stagecoach
which increased congestion. Fare increases also led to higher profits for private companies instead of benefitting
the local council
Public private partnerships
This means that for projects, the government could try to involve the private sector. This means they pay part of
the cost and brings expertise and incentives for the private sector into the project.
Evaluation
Private companies tend to cherry pick projects that mean they get the profit rather than the government
Rely on good will
Some public sector services like education, the usual profit motive is not all dominant
Reducing bureaucracy and creating a well-funded service is a powerful way to get the most from government
funds
Employ outside private sector consultants to make decisions about how to cut costs
Delegate certain decisions to non-political bodies e.g. setting interest rates was given to the BoE as politicians
often set interest rates for political reasons. This meant they had political neutrality.
Subsidy
, Effects
Lower prices and quantity demanded increases
May be positive externalities and this may increase output to socially efficient levels
Help poorer families e.g. food and childcare costs
o Achieve a more equitable distribution of income
Encourage output and investment in fledgling sectors
Protect jobs in loss-making industries e.g. hit by recession
Make some health care treatments more affordable
Reduce the cost of training & employing workers
Reduce some external costs of transport + encourage arts and other cultural services
Lower costs of production – price decrease, quantity increase, solves underconsumption, allocative efficiency and welfare
gain
Depends on
Elasticity of demand
o Inelastic = larger effect on price
o Elastic = larger effect on output
Expensive
o Burden on taxpayer
o Other incentives may be needed
o Opportunity cost
o Reproductive debt?
Reduces incentives for firms to cut costs
o Should avoid subsidisation unless there’s a clear social benefit
o E.g. the temporary US agricultural subsidies have grown in cost and influence and proved very difficult to
remove
o May become dependent on state aid and financial assistance
o Time lags and long run effectiveness
Government failure and unintended consequences
Depends on how firms use the subsidy
Setting subsidy at the right level is hard
Agriculture market
Types of market failure in agriculture
1. Volatile prices/ supply
2. Low and volatile income for famers
3. Environmental costs of intensive farming (negative externalities)
