Real examples of government failure

A-level Economics

CAP – The Common Agricultural Policy

The aim of CAP: To correct market failure caused by volatile prices within the EU agricultural markets (unstable commodity prices, a market failure topic you can read about on this website). The aim is to maintain price stability within these markets and guarantee farmers an minimum income level.

How it’s achieved: Buffer stock schemes, subsidies, tariffs on imported goods outside the EU

Why the government fails:

1) Farmers are guaranteed a minimum price for their produce. Any excess supply is bought by the government. This reduces the risk for farmers and encourages overproduction (a moral hazard problem). Therefore, it is very costly for the government

2) Large amounts of perishable produce needs to be destroyed, despite buffer stocks. This means excessive waste

3) It can mean increased food prices for households – the government guarantees farmers a minimum price. The cost to households may be greater than the benefit to farmers

4) It causes conflicts with other countries’ agricultural interests – tariffs discourages global competition

Many economists argue that this policy has caused a net welfare loss, therefore, a government failure.

Housing Markets – Maximum Rents

The aim of maximum rent prices: To correct market failure caused by excessive rental prices in the housing market. The aim is to bring rent prices down to a more affordable level.

How it’s achieved: Maximum pricing policies (price ceilings)

Why the government fails:

1) Maximum rent prices is bad for landlords. Less houses will be made available for rent, causing excess demand for rental houses.

2) It can cause a black market to develop. Many landlords will rent their houses out “off the books” and deal in cash only. This means consumer protection is at greater risk, and the government does not receive any tax revenues as a result

3) It can affect employment levels in certain areas. A shortage of housing means a shortage of workers too.

Subsidising Public Transport

The aim of subsidisation of public transport: To correct market failure caused by the excessive number of drivers on the road, causing congestion and contributing to global warming. The aim is to make public transport more affordable for consumers.

How it’s achieved: Subsidies

Why the government fails:

1) Public transport is an inferior good. The more you earn, the less you want to use public transport. Subsidising public transport may not increase consumption by much at all

2) It’s costly, so taxpayer money is being used to pay for subsidies, even though people still may choose to drive

3) Public transport is still inconvenient for many people. In rural areas especially, public transport is too time consuming for most people. However, in populated areas, like the City of London, public transport is much more successf

Fishing Quotas

The aim of fishing quotas: To correct market failure caused by the excessive fishing which depletes this valuable resource.

How it’s achieved: Quotas

Why the government fails:

1) Fish stocks continue to be depleted. This suggests the policy is not doing what is meant to do

2) It can be difficult for fishermen to manage. Sometimes fishermen accidentally overfish. These fish are then thrown back into the ocean, even though they’re dead. These fish are known as “discards” and it is seen as extremely wasteful

3) The monitoring and policing is expensive and difficult to control. “It is estimated that, each year 970 – 2,700 billion fishes are caught from the wild” (Google it). Therefore, boats may still overfish illegally because it’s easy to get away with it (can you imagine counting all those fish?)

What have we learned?