8.10 Government Failure

Question 1

What is government failure?

Answer 1

• When government intervention leads to failure (a less socially efficient outcome in society)
• Governments can fail when they intervene in markets.
• They could worsen the market failure already present or a new failure might occur.
• This results in a net welfare loss to society.
• The loss could be from having ineffective intervention or when harm is caused

Question 2

What are some causes of government failure?

Answer 2

• Distortion of price signals
• Unintended consequences
• Excessive administrative costs
• Information gaps

Question 3

Causes of government failure-distortion of price signals

Answer 3

• Government subsidies could distort price signals by distorting the free market
  mechanism.
• A free market economist would argue that this could lead to government failure.
• There could be an inefficient allocation of resources because the market mechanism is not able to act freely.
• For example, the government might end up subsidising an industry which is failing or has few prospects.

Question 4

Causes of government failure-unintended consequences

Answer 4

• This is when the actions of producers and consumers have unexpected, or
  unintended, consequences.
• With government policies, consumers react in unexpected ways.
• A policy could be undermined, which could make government policies expensive to implement, since it is harder to achieve their original goals.

Question 5

Causes of government failure-excessive administrative costs

Answer 5

• The social benefits of a policy might not be worth the financial cost of administering the policy.
• It might cost more than the government anticipated.
• The government has to consider whether the policy is good value for money.

Question 6

Causes of government failure-information gaps

Answer 6

• Some policies might be decided without perfect information.
• This might require a full cost-benefit analysis, and it could be time-consuming and expensive.
• For example, government housing policies are long term, and have failed several times in the past.
• However, it is impractical for governments to gain every bit of information they
  need, so assumptions are made.