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
Causes of government failure
Distortion of price signals
Unintended consequences
Excessive administrative costs
Information gaps
Distortion of price signals
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.
Distortion of price signals
The government might end up subsidising an industry which is failing or has few prospects
Unintended consequences
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.
Excessive administrative costs
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.
Information gaps
Some policies might be decided without perfect information. This might require a full cost-benefit analysis, and it could be time-consuming and expensive. However, it is impractical for governments to gain every bit of information they need, so assumptions are made.
Government housing policies are long term, and have failed several times in the past
