Gov Failure

• Government failure is when the costs of government intervention in a market outweighs the benefits that come from an intervention
• Government failure results in a worsening of the allocation of scarce resources and a worsening of social welfare
• Even if there is a pre-existing market failure, government intervention may not be the best solution due to the risk of government failure
• Government failure


  When the costs of government intervention in a market outweighs the benefits that come from an intervention
• Evaluating government intervention


  1. Consider if the risk of government failure is significant or not

  2. If the benefits will exceed the costs, then intervention may be worthwhile

  3. If the costs will exceed the benefits, then no government intervention may be better
• Causes of government failure

  • Governments/politicians/policymakers may not have full information required to make effective policy decisions
  • High direct costs of policy administration and enforcement
  • Unintended consequences of policies
  • Regulatory capture where the interests of firms are prioritised over societal interests
• Lack of full information can lead to ineffective policies where the costs outweigh the benefits
• High administration and enforcement costs of policies like regulation, subsidies, and price controls can outweigh the benefits
• Unintended consequences like black markets, negative impacts on the poor, and firms becoming dependent on subsidies can lead to government failure
• Regulatory capture occurs when firms influence regulators to reduce the extent of regulation, prioritising firm interests over societal interests
• The high costs of maintaining regulatory authorities can outweigh the benefits of monopoly regulation, leading to government failure