Government failure (Pack 14)

• What is the definition of 'government failure'?


  When government intervention leads to an inefficient allocation of resources and a net welfare loss
• Why might government failure occur in the market for cigarettes?

  Due to misallocation of resources and ineffective regulation
• How can government provision of healthcare lead to government failure?

  It may result in inefficiencies and overuse of services
• How can minimum prices contribute to government failure?

  They can create surpluses and market distortions
• What are the causes of government failure?

  They are:

  • Distortion of price signals (distorts the price mechanism due to misallocation)
  • Unintended consequences (E.g. Energy policies leading to air pollution
  • Excessive administration costs (Money spent monitoring and enforcing the intervention)
  • Information gaps (Government may make irrational decisions leading to misallocation of resources)