Problems with Government Intervention

Problems with Government Intervention

• Paternalism – When government intervenes in people’s choices to protect them from their own ignorance. Example: Fines for not wearing your seat belt. Drug restriction laws.

• Indirect Costs – Most government interventions in the economy impose costs on firms and people on top of the taxes they have to pay:

1. Changes in Costs of Production – this includes increased costs for businesses for things like government safety and emissions standards on pollution.
2. Costs of Compliance – this includes costs of things like red tape, legal fees and reports.
3. Rent Seeking – When firms take advantage of the law and use the government to improve their own well being. Example: Sometimes farmers can intentionally keep their crops low to get more subsidies from the government.

• Decision Makers’ Objectives – Often politicians have their own special interests in mind when passing laws rather than society as a whole. Example: Some politicians might choose the policy that will get them re-elected or help lobbyists rather than what's best for the people.
• Public Choice Theory – Elected officials seek to maximize their votes. Civil servants (like police officers) seek to maximize their salary. Voters seek to maximize their own utility.
• Rational Ignorance – When voters have no incentive to become informed about some government policy because the costs of becoming informed exceed the benefits of becoming informed.