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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)