Government Failure

• what is government failure?

  government intervention in the economy leads to a misallocation of resources
• what are the causes of gov failure?

  • price signal distortion
  • unintended consequences
  • excessive administrative costs
  • information gaps
• what is distortion of price signals?

  gov subsidies could distort price signals by distorting free market mechanism = inefficient allocation of resources as the market is not able to act freely
• what are unintended consequences?

  consumers can react in an unexpected way to policies = more expensive for the policies to be implemented
• what are administrative costs?

  the cost of the gov intervening in markets e.g implementing new policies
• how does inadequate info lead to gov failure?

  some policies may be decided without perfect info = decided upon assumptions = cost - benefit analysis is needed which is time consuming + expensive
• how can inadequate info affect the market?

  economic agents decision making is flawed
• how does conflicting objectives lead to market failure?

  people appointed to represent the public may prioritise their own self interests over social welfare as they exploit the power they have