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

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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

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Distortion of the Market

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

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Unintended Consequences

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

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Information Gaps

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