Government Failure

  • Created by: April15
  • Created on: 18-02-20 18:15

Governments fail by creating a net loss of economic welfare when intervening with the market. The total social costs are higher than the total social benefits.

An example of price signal distortion: When governments intervene, they may change price signals. When imposing taxes on imported foods, such as fruits and veg, consumers may stop buying them and replace them with cheaper items such as dried fruit or veggie chips which actually have higher sugar contents and are more unhealthy. This may cause a rise in obesity which increases total social cost.

Reasons for government failure:

  • Excessive administrative costs-cost of correcting failure is bigger than the welfare benefit (e.g. a scheme to help unemployed people to get back to work) 
  • Information gaps- government may make wrong policies due to misleading information 
  • Unintended consequences-may increases welfare in certain areas but make it difficult for other areas to prosper 
  • Conflicting objectives-decisions made has an opportunity cost, (e.g. may want to cut taxes but increase spending on defence) 
  • Maximisation of politician's own welfare-public choice theory and rent-seeking behaviour
  • The public theory/theories


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