1.4.2 - Government failure

• Causes of government failure

  • Distortion of price signals
  • unintended administrative costs
  • information gap
• Government failure is when government intervention leads to a net welfare loss in society
• Distortion of price signals:

  Some types of government intervention change price signals in the market and distort the free market mechanism. As a result, they keep some companies in business when they are inefficient so the resources should be switched to somewhere else (subsidies) or make consumers pay too much for a good (taxes)