7a. Government failure

Law of unintended consequences

Law of unintended consequences

Government intervention can have negative unintended consequences.

E.g. a tax on cigarettes can create a black market where cigarettes are sold without tax.

Administration costs

The miscellaneous costs of government intervention.

E.g. paperwork, legal fees, secretaries, managers.

Information gaps

When the government lacks the information needed to intervene most efficiently.

E.g. the government doesn’t know what size to set for its carbon tax.

Distortion of the price mechanism

Government intervention can distort the price mechanism.

E.g. a minimum price will create excess supply between Qd and Qs:

at front

E.g. a maximum price will create excess demand between Qs and Qd: