Government Failure

• Government failure occurs when government intervention proves to be unwarrented, either because markets are performing adequetely or public policy does not correct a market failure efficiently.
• Government intervention could exacerbate a problem/produce unintended negative results making the cost of government failure > cost of market failure.
• Cost of intervention:

  • Subsidies add to government spending
  • Administrative costs
  • Imperfect information
  • Distortion of incentives
  • Political agenda
• Benefits of intervention:

  • Correction / Reduction of market failure
• Since government failure may result in missed opportunities and wasted resources, market failure must be balanced against government failure.