Government failure

Define government failure

When government intervention to fix a market failure in an economy leads to net loss in economic wefare

Causes of government failure

• Information gap

• Lack of incentives

• Unintended consequences

• Excessive administrative costs

• Moral hazard

Information gap

• Too much data required o put policy in place

• If government relies on firms for info, firms may lie (asymmetric info) to benefit themselves

Lack of incentives

• If incentive not strong enough, firms/consumers may not change behaviors

• Public choice theory - Politicians may act in own self-interest rather than welfare of citizens

• Rent-seeking - Use of political power to influence distribution for their own benefit rather than any extra benefit for society

Unintended consequences

Also due to information failure, consequence may arise that government wasn’t aware of/prepared for

Excessive administrative costs

• Government intervention requires monitoring and enforcement (expensive)

• If costs outweigh benefits, could lead to net welfare loss

Moral hazard

When government steps in, individuals or firms may take more risks (because they believe the government will step in again)