Government Failure

Government failure exists when the government intervenes to correct a market failure but this can result in a more inefficient allocation of resources.

Example 1: Mexico City and emissions from cars — tackling transport market failure
A good example of government failure is Mexico’s approach to reducing CO2 emissions in Mexico City. Their policy was very simple — cars with even/odd number plates were allowed into the city on alternate days, which in theory should have reduced the number of cars entering the city by a half. However, the reality was very different. Car-owners sold their nice cars, and bought two, older and more polluting cars — one with an even number plate and one with an odd plate. Result: an increase in CO2 emissions and Government failure.

Example 2: The Common Agricultural Policy (CAP) — tackling agricultural market failure
The aim of CAP is to stabilise agricultural prices and provide a satisfactory level of income for farmers in the European Union (EU). However, the outcome is inefficient. Farmers produce too much, and excess supply is bought by the EU and stored (causing ‘wine lakes’ and ‘butter mountains’). So, the EU has to pay subsidies to farmers AND pay for warehouses and storage. Result: an inefficient use of Government money and Government failure.

Example 3: The National Minimum Wage — tackling labour market failure
This was introduced to protect workers who received low pay, by making it illegal for employers to pay a wage below the NMW. However, those workers who managed to retain their job ended up with higher pay, but some workers would lose their jobs and therefore be worse off. Result: a more inefficient market outcome and government failure.

Example 4: Rent controls — tackling housing market failure
Many people in the UK struggle to pay for ever-more-expensive housing, especially with the increasing housing shortage in the South-East. If the government were to consider the level of rent to be unacceptably high, then they could impose a maximum rent. Maximum prices are set below the market equilibrium price, so that in this case demand for houses exceeds supply of houses, causing a housing shortage — some people will be worse off. Result: Government failure.

Source: EdExcel Tutor Support Materials

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