Government Failure

Question 1

What is government failure?

Answer 1

Government failure occurs when government intervention in the economy causes a net welfare loss.

Question 2

What causes government failure?

Answer 2

1. Lack of incentives working for the government.
   Government bodies do not have the same profit motives of private companies. Therefore managers and
   workers may feel no incentive to work hard or cut costs. The result can be government agencies that are inefficient, with higher costs and not producing what people need.
2. Unintended consequences. Often government intervention tries to solve one problem, but another problem is created such as minimum pricing, increasing prices on tobacco and higher income tax.
3. Lack of information. Government bodies can suffer from a lack of knowledge about how to intervene, just as we can get a lack of information in a free market.