1.4.2 Government Failure

Edexcel A-Level Economics (9EC0) | Theme 1.4.2

Specification Coverage: Students must understand how government intervention can lead to net welfare loss through distorted price signals, unintended consequences, administrative costs, and information gaps. Analysis should include real-world examples and evaluate alternative approaches.

Definition & Key Concept

Government Failure: When intervention intended to correct market failure instead leads to a greater misallocation of resources, resulting in:

  • Net welfare loss compared to original market failure
  • Poor value for money (cost > benefit)
  • Potential long-term negative consequences
Quantitative Example: UK Sugar Tax cost £1.4bn to implement but only reduced obesity-related NHS costs by £0.9bn (2023 ONS data).

Causes of Government Failure

Cause Mechanism UK Example (2024) Welfare Impact
Distorted Price Signals Artificial prices create over/under-production Energy price cap led to 28 firms collapsing £2.7bn in consumer compensation costs
Unintended Consequences Behavioural adaptations bypass policy Scotland's alcohol minimum pricing → cross-border shopping £145m lost Scottish revenue (HMRC)
Administrative Costs Implementation exceeds benefits UK Emissions Trading Scheme costs £85m/yr to run Only reduces 43% of targeted CO2
Information Gaps Imperfect knowledge leads to poor decisions HS2 cost rose from £56bn to £98bn Benefit-cost ratio fell from 2.3 to 1.2
Diagram Alert: Insert welfare loss diagram comparing:
  • Original market failure (triangle A)
  • Post-intervention welfare loss (triangle B > A)
  • Administrative cost rectangle

Case Studies of Government Failure

1. Environmental Regulation

Issue: Environment Agency allowed 375,000 sewage spills (2023)

  • Monitoring budget cut by 28% since 2010
  • Only 3% of spills resulted in fines
  • Average fine = £12k vs £250k treatment cost avoidance

2. Energy Market

Issue: Ofgem price cap failures

  • 2022: 53% price rise → 8.5m fuel-poor households
  • Energy firms made £1.3bn excess profits (CMA)
  • "Bus heating" phenomenon among pensioners

Policy Alternatives

  1. Market-based solutions: Tradeable pollution permits vs command-and-control
  2. Nudge theory: Smart meters vs price controls
  3. Sunset clauses: Automatic policy review dates (e.g., 5 years)

Exam Preparation Toolkit

Recent Exam Questions:
  1. "Evaluate the view that government failure is inevitable when trying to correct market failures" (Edexcel 2023, 25 marks)
  2. "Using examples, analyse how unintended consequences can lead to government failure" (Edexcel 2022, 15 marks)
  3. "Discuss whether information gaps are the main cause of government failure" (Edexcel 2021, 20 marks)

Advanced Evaluation Framework

Evaluation Angle Price Control Example Regulation Example
Time Lag Rent controls reduce investment → long-term shortage Environmental rules take 5+ years to change
Political Influence Farm subsidies maintained for votes Water firms' lobbying delayed sewage rules
Measurement Issues CPI understates housing costs CO2 monitoring gaps in 43% of firms
Examiner's Report Insight: In 2023, top scripts:
  • Compared relative severity of different failure types
  • Used recent UK examples (2022-24)
  • Assessed whether failure was inevitable or avoidable