The Possibility of Government Failure

1. The Possibility of Government Failure By the end of this lesson, you: • Must know the causes of government failure. • Should understand how the CAP works. • Could be able to evaluate the effects of government failure upon the allocation of resources.

3. Effects of Government Intervention • Public goods – think of one positive effect and one negative effect. • Externalities • Regulation – what’s this? • Pollution permits – what are the incentives? • Taxes – supply curve shift (left or right?) • Correcting information failures – think of an example • Price intervention – when would you draw the following diagrams? • Buffer stock diagram showing the maximum price and minimum price • Buffer stock diagram showing one stable price and shifts in the supply curve • Regulation and the control of power – what does the Competition Commission do? • Redistribution of income: • What are means-tested benefits? • What are in-kind benefits?

4. Causes of Government Failure • Political self-interest • What is fiscal policy? • What is the difference between active and discretionary fiscal policy? • When might a government opt for each? • Policy myopia • Should UK industries be protected? • Should the USA have bailed out the car industries in 2009? • Regulatory capture – what are the main objectives of the CAP II (1992)? • Disincentive effects – draw a diagram to show how a national minimum wage might work (Quantity of Labour against Wage Rate) • Policy decisions based on imperfect information – let market forces rule • What is the law of unintended consequences? • Costs of administration and enforcement • Conflicting objectives – what might happen if a government stimulates AD and does not introduce supply-side reforms.

8. National Minimum Wage

9. National Minimum Wage • A NMW set above the free-market wage for certain groups ____________ the marginal cost of employing people - so firms will cut jobs, reduce hours of work for employees and unemployment will rise.  • Other workers will demand higher wages to maintain pay differentials (this is known as "pay leap-frogging"). An ________________ in the total wage bill may cause cost-push inflation and damage the price competitiveness of UK producers in international markets.  • __________ and low-skilled workers will lose out - firms will tend to employ __________ workers whose experience is greater. There will be a substitution effect that works against younger participants in the labour market. • Some firms may ____________ investment in worker training because of falling profits.  • A minimum wage does not reduce ______________ because many poor households do not have a low-income earner. Poverty is concentrated in those groups where no one is in paid employment. A minimum wage has little direct effect on these households - better to introduce a minimum income guarantee.  • A NMW does not take into account ________________ differences in cost of living and will have a distortionary effect on the way the UK labour market works.

10. National Minimum Wage • A NMW set above the free-market wage for certain groups increases the marginal cost of employing people - so firms will cut jobs, reduce hours of work for employees and unemployment will rise.  • Other workers will demand higher wages to maintain pay differentials (this is known as "pay leap-frogging"). An increase in the total wage bill may cause cost-push inflation and damage the price competitiveness of UK producers in international markets.  • Young and low-skilled workers will lose out - firms will tend to employ older workers whose experience is greater. There will be a substitution effect that works against younger participants in the labour market. • Some firms may reduce investment in worker training because of falling profits.  • A minimum wage does not reduce poverty because many poor households do not have a low-income earner. Poverty is concentrated in those groups where no one is in paid employment. A minimum wage has little direct effect on these households - better to introduce a minimum income guarantee.  • A NMW does not take into account regional differences in cost of living and will have a distortionary effect on the way the UK labour market works.

11. The Law of Unintended Consequences Smoking Ban in Scotland

13. The Possibility of Government Failure By the end of this lesson, you: • Must know the causes of government failure. • Should understand how the CAP works. • Could be able to evaluate the effects of government failure upon the allocation of resources.