8.10 Government Failure

• Government Failure 

  • 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.
• What is a cause of government failure related to price signals?

  Distortion of price signals
• How does distortion of price signals affect resource allocation?

  It leads to inefficient allocation of resources
• What might happen if the government subsidizes a failing industry?

  It may have few prospects for success
• What are unintended consequences in the context of government actions?

  Unexpected reactions from producers and consumers
• How can unintended consequences affect government policies?

  They can undermine the policies' effectiveness
• What is a potential financial issue with government policies?

  Excessive administrative costs
• What might happen if the social benefits of a policy are less than its costs?

  It may not be worth implementing
• What is a challenge related to information gaps in policy-making?

  Decisions may be made without perfect information
• Why might a full cost-benefit analysis be impractical for governments?

  It is time-consuming and expensive
• What do governments often do due to information gaps?

  Make assumptions in policy decisions