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Government failures

6 important questions on Government failures

Difference between marker and non-market failure:

Market failures: market organizations receive revenue from prices charged for output sold in markets, where buyers can choose.

market mechanism = invisible hand

Non-market failure: non-market organizations receive revenues from non-price sources such as donations and subsidies (collected from taxes)

no market mechanism, government = 'visible hand'

What are the determinants of internalities?

1. Initial standards are reasonable proxies for output of agency (adapting to external environment is hard)
2. Agency members select goals that maximize their income, status, power etc.
2. Internalities are selected because the correspond to the desires of group stakeholders.

What are the 3 types of internalities?

1. Budget growth: more is always better, instead of reducing (a company has an incentive to reduce costs)
2. Technological advance: new and more complexe is always better. (but also resistance to change)
3. Information acquisition and control: departments do not share info. In this way they stay in control over info.

What are redundant and rising costs?

Tendency toward unnecessary and redundant costs. Production takes place in an inefficient way (x-inefficiency) or possibilities to reduce costs are not fully exploited. This problem tends to increase over time.

What are derived externalities?

Unanticipated side effects, possibly in other areas. (e.g. The 'war on drugs' increases profitability and criminal activity associated with production and distribution)

What is distributional inequity?

Redistribution of power: intervention is always based on exercise of power
redistribution of income: policy measures may consist of redistributive mechanisms

The question on the page originate from the summary of the following study material:

Lecture Regulation I: economic perspective

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