Question

1. Much of what we’ve been studying lately has related to market failure. In C7, the text goes through different public policy responses to market failure, such as command-control, taxes, subsidies and direct public action and how to evaluate the strengths and weaknesses of each one in an ideal world. Describe why we might expect, in practice, a government failure to correct a known market failure. What are some ways government failure can happen? For instance, describe the long term impacts of public subsidies intended to avoid deadweight loss associated with low fishing incomes.

Answer 1

SOL.) Government failure is defined as a situation where government intervention in the economy creates inefficiency and leads to a misallocation of scarce resources. It occurs when governmental action creates an inefficient outcome, where efficiency would otherwise exist .For example: regulatory capture and regulatory arbitrage .

Market failure is a situation in which the allotment of goods and services by a free market does not follow Pareto efficiency, often leading to a net loss of economic value.

We often expect government failure to correct a known market failure because:

1. Government can overcome market failure and thus improve economic efficiency . For example, governments can subsidise or provide goods with positive externalities.
2. Government can distribute the wealth and goods with greater equality among people..
3. Government intervention can be done to overcome unemployment and prolonged market recession.
4. For Securing important social activites and government can also deal with health crisis such as pandemic .

Some ways due to which government failure can happen are as follows:-

• Human factor- Humans are involved in every process design, operation, maintenance, etc .People are most important components of industrial processes.No step in the process life cycle is without some human involvement. It is usual for humans to strive to reach personal interests and maximize welfare. Thus if a person places own interests above common interests, decisions taken by such person can degrade public welfare .

• Impact of interest or pressure groups- Pressure groups are a vital link between the government and the governed. They keep governments more responsive to the demands of the society or community, especially in between elections.Pressure groups are able to express the views of minority groups in the community who might not get noticed most of the times. Sometimes they are able to manipulate politicians inside a government in order to reach their common goals. It is difficult for the society to expose them because these groups act in a reasonable way due to restricted number of members and common objective in contrast to the rest of the society.

• Incorrect information- It is a type of market failure which causes government failure. Even the state cannot be provided with all the information, which is necessary to reach the equilibrium and stability within the market.

• Government intervention -Government intervention is regulatory action taken by government that seek to change the decisions made by individuals, groups and organisations about social and economic matters.It is the action carried out by the government that affects the market with the objective of changing the free market outcome.

• Costs of administration - Government intervention can prove costly to administer and enforce. The estimated social benefits of a particular policy might be largely swamped by the administrative costs of introducing it.

A subsidy is a benefit given by the government to groups or individuals, usually in the form of a cash payment or a tax reduction. And deadweight loss is defined as a cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium.

To measure the impact on profitability that a subsidy has is not an easy task and we need to make some assumptions. The main guiding principle for the assessment of the public subsidies intended to avoid deadweight loss associated with low fishing incomes is based on the assumption that all positive subsidies are beneficial to the industry and that if governments did not provide them, the industry would either have to or want to pay for them itself. Hence, all positive subsidies have a positive value to the industry. This is of course a simplification of a much more complicated analysis.The value of a subsidy accruing to the fishing industry is most accurately estimated as the cost that the industry would have to pay on commercial terms for obtaining the same service or good and that this principle should be utilized whenever possible.

It is important that the cost of a subsidy is evaluated not only as the financial transfer it may entail but to implement the regulation. This implementation cost includes personnel cost and other operational costs incurred by, for instance, fisheries administrations or other government agencies dealing with subsidies reaching the fisheries sector.With regard to the value of fisheries subsidies expressed as the cost to the government, the assessment has to be based mainly on information from the public budget, except for in the case of foregone revenues which are generally not included in the budget and will have to be assessed separately.

So this was the long term impact of public subsidies intended to avoid deadweight loss associated with low fishing incomes .