7a. Government failure

Government failure occurs when an intervention leads to a deeper market failure or causes a new market failure.

It can happen if a policy fails to create enough of an incentive for people to change their behaviour or if policies are poorly judged or expensive and make problems worse

Causes of government failure

• Political self-interest – the government is influenced by political lobbying
• Poor value for money – low productivity or high waste after a policy is implemented makes spending less effective
• Policy short-termism – Governments looking for quick solutions
• Regulatory capture – A government agency operates in favour of producers
• Conflicting objectives – the objective of one policy might conflict with the objective of another
• Bureaucracy and red tape – additional paperwork and barriers that are created slow productivity

Distortion of the Market

Government intervention can cause the market to move away from the equilibrium and create shortages

Unintended Consequences

Government intervention can have unexpected adverse effects e.g. increasing benefits may increase unemployment

Information Gaps

Imperfect information may create a welfare loss as the government may over or under subsidise/tax/regulate products