Government Failure
- Government failure occurs when the government intervenes in a market to correct market failure, but the intervention results in a more inefficient allocation of resources from society's point of view
- This results in even greater welfare loss
- Usually represents poor value for money
- May have long term consequences
Causes of Government Failure
- Distortion of Price Signals
- The signaling function of the price mechanism is artificially altered
- For example, a minimum price sends a signal to producers to supply more
- In agricultural markets this has often resulted in an excess of perishable products which end up going to waste i.e. inefficient allocation of resources
- In demerit markets higher prices seem to be sending the message to increase supply (e.g. minimum price on alcohol). if producers do that, they will make greater losses. They often have to reduce supply
- Price intervention may help solve one problem but creates others
- Unintended Consequences
- Producers and consumers aim to maximise their self interest
- This often leads them to look for legal or illegal loop holes to bypass government intervention
- This result creates unintended consequences such as the creation of illegal markets and/or illegal production/consumption
- Excessive Administrative Costs
- Regulation or administration costs can be expensive
- The costs can sometimes be greater than the savings in social welfare
- Information Gaps
- Government decision making is subject to the same information gaps and cognitive biases (e.g. anchoring) that consumers face
- Decision makers do not have perfect information
- Decision makers are subject to political pressure
