- Distortion of price signals
- A distortion of price signals is when a government rule stops prices acting as messengers that tell buyers and sellers about demand and supply.
- Unintended consequences
- Unintended consequences are effects of a policy that its makers did not plan, as people respond in unexpected ways that undermine the policy's intent.
Government failure in four policies
Can you think of a real policy for each of the four causes of government failure?
Three are real policies from the source; the fourth is invented. Each example names the cause and its mechanism.
Farm price supports are price floors that keep farm prices above equilibrium, usually by the government buying up the product to add to demand.
Can you think of an example?
The European Union held the price of wheat above equilibrium, so farmers grew more than buyers wanted and taxpayers bought the surplus. Cause: distortion of price signals, since the price told farmers to grow more than consumers would buy.
A tariff is a tax added on imported goods, which raises their price to buyers and shields home producers from foreign rivals.
Can you think of an example?
In 2009 the United States raised its tariff on tyres from China to protect tyre-making jobs. Estimates in the source say it saved about 1,200 but cost about 3,700 in other industries, as buyers paying more for tyres spent less elsewhere. Cause: unintended consequences.
Command-and-control regulation is a set of laws stating how much pollution firms may emit, and often which equipment they must use to cut it.
Can you think of an example?
One limit for every factory treats firms that could cut pollution cheaply like firms for which it is costly, because the rule-writer cannot see each firm's costs. Cause: an information gap, so pollution falls at needless cost.
A licensing scheme requires every seller in a market to hold a permit from a public body, which checks applicants and enforces the rule.
Can you think of an example?
A council makes every window cleaner hold a licence to deter rogue traders. Vetting and enforcement cost £60,000 a year; the harm from rogue traders was about £5,000 a year. Cause: excessive administrative costs.