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EUROPEAN CENTRAL BANK: The central bank for the European Union and Economic and Monetary Union this is charged with monitoring monetary policy and introducing euros into circulation (beginning in 2002). The European Central Bank has a comparable, but perhaps somewhat less powerful, role as the Federal Reserve Board of Governors in the United States. It is took over for the European Monetary Institute in 1998 and is the executive body of the European System of Central Banks.

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GOVERNMENT FAILURES:

Inefficiencies in the allocation of resources attributable to imperfections in the operation of governments. Government failures are based on the utility-maximizing behavior of politicians, voters, nonvoters, special interest groups, and government employees. The identification and analysis of government failures is central to the study of public choice and offers something of a counterbalance to government actions designed to address the inefficiencies of market failures.
Governments -- state, local, and federal -- are the institutions used by society to regulate and control the economy. A primary reason for the very existence of governments is to address the resource allocation inefficiencies created by market failures. However, in an application of the fifth rule of imperfection, government actions generate their own set of inefficiencies.

Government failures fall into four main categories: (1) election-seeking politicians, (2) voters (and nonvoters), (3) special interest groups, and (4) bureaucracies and government employees. Inefficiencies arise because politicians, voters, and government employees seek to maximize their individual utilities, actions which do not necessarily lead to the maximization of society's overall well-being.

A Word on Public Choice

Government failures are central to the study of public choice. Public choice is the economic study of joint decisions such as those typically made by voters, government agencies, and political leaders. This study is based on the application of standard utility-maximizing behavior to decision making in the political arena. People not only maximize utility when buying products, but also when voting in elections. Politicians maximize utility when running for office. Government workers maximize utility when implementing government policies. This pursuit of individual satisfaction by players of the political game often conflicts with the general well-being of society.

The Fifth Rule of Imperfection

Mistakes happen. People are not perfect. People run government. People make public choices. People vote. People are elected to government office. People implement government policies.

And people are not perfect. Neither is government. This notion is captured by the fifth rule of imperfection. The fifth rule of imperfection (the fifth of seven basic rules of the economy) is the observation that the real world is not perfect, that both markets and governments can fail to achieve efficiency.

Government actions are often aimed at correcting the inefficiency failings of the market. Markets fail due to public goods, market control, externalities, and imperfect information. Governments intervene in the economy with the goal of correcting these failings and achieving efficiency.

However, government intervention is also imperfect and inefficient. The actions needed to correct market failures might not be implemented correctly or effectively. For example, government might intervene to correct the imperfection of market control only to increase market control and the resulting inefficiency.

Sources of Government Failure

Public choice is the study of government decisions and how those decisions can be imperfect and inefficient. These efficiency problems can be attributed to four different players in the political game -- politicians, voters, interest groups, and bureaucracies.
  • Politicians: These are members of society who seek elected offices. Problems and inefficiencies arise because politicians, like all human beings, seek to maximize their own utility. This pursuit can and does conflict with doing what's best for the economy. Elected politicians often fall victim to the principal-agent problem.

  • Voters: People, citizens of a nation, also seek to maximize their own utility. Two rational choices they make in this pursuit are to NOT be informed (rational ignorance) and to NOT participate in the political process (rational abstention). Such "apathy" means that elected leaders can ignore their preferences.

  • Interest Groups: While some people have little or no involvement in the political process, others have a great deal of involvement. These people, who also seek to maximize utility, have more to gain or lose from particular government actions and are thus motivated to act accordingly, usually by forming special interest groups.

  • Bureaucracies: Government policies are usually implemented by complex organizations. Those who work in these bureaucracies are also, you guessed it, utility maximizers. Their pursuit of utility can and does conflict with the efficient implementation of government policies.

Market Failures

Analysis of government failures is often undertaken as a counter to market failures. Market failures occur when markets do not efficiently allocate resources in a manner that achieves the greatest possible level of satisfaction. These failures prompt government intervention in the economy. Market failures come in four varieties.
  • Public Good: A public good is a good that can be consumed simultaneously by a large number of people without the consumption by one imposing an opportunity cost on others. This is the primary reason for many government functions, especially common defense and public health.

  • Market Control: Market control arises when buyers or sellers are able to exert influence over the price of a good and/or the quantity exchanged.

  • Externality: An externality exists if the market price does not include all benefits and costs of producing, consuming, and exchanging a good.

  • Imperfection Information: The lack of information among buyers or sellers often means that the market price does not fully reflect all benefits or opportunity costs of producing, consuming, and exchanging a good.
With each of these failures, market exchanges do not achieve an efficient allocation of resources indicated by an equality between the value of goods produced and the value of goods not produced. Often the inequality is indicated by an inequality between the demand price and supply price in a market, as with market control. In other cases the inequality results because markets are not even available to exchange goods, such as the public goods of common defense or public health. In still other cases markets do not fully capture the value of goods produce and not produced in the demand and supply prices, seen with externalities and imperfect information.

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Recommended Citation:

GOVERNMENT FAILURES, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 22, 2018].


Check Out These Related Terms...

     | public choice | rational ignorance | rational abstention | principal-agent problem | voting problems | political entrepreneurs | special interest groups | government bureaucracies |


Or For A Little Background...

     | market failures | government functions | public finance | efficiency | public sector | private sector | utility maximization | market efficiency | fifth rule of imperfection | seven economic rules |


And For Further Study...

     | voting rules | median voter principle | logrolling | voting paradox | capture theory of regulation | rent seeking | Tiebout hypothesis |


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