Government Failure

A-level Economics

What is it and how do governments fail?

Definition: When the government intervenes in the market and it causes a net welfare loss.

There is often an unintended consequence involved with government failure. Policies can be put in place to improve social welfare, but the government may forget a vital factor that can render the policy useless.

Example:

For example, charging people to dispose of waste. The intention of this to stop people disposing too much waste. However, the unintended consequence of this is fly-tipping and the cost of cleaning it up. This could be worse for society.

How can governments fail?

Here are just some examples of how a government may fail to correct market failure.

Bureaucracy – a policy’s rules and regulations can make it too difficult for firms to follow. This is often referred to as “red tape”. This can become too complex and costly for firms. Firms can become more inefficient, increasing their costs. They then may pass these costs onto consumers. It can also lead to less output being produced. This can result in a net welfare loss.

Time lags – sometimes a policy may need a significant period of time to come into effect. A good policy might be put in place by the government, but because there isn’t enough evidence to suggest that the policy worked in the short term, the policy might be scrapped in its early stages.

Administrative costs – policies cost a lot of money to administer. These costs need to be taken into account. If they’re calculated incorrectly, then government failure is likely to occur. Remember, that policies often require policing too. People need to be paid to enforce the rules and regulations in government policies. Again, this costs money.

Information failure – the government intervenes in the case where it feels there will be a net social benefit to society from intervention. If the government used incorrect data to form the foundations of their policies, it is very likely that the policy will fail. “Rubbish in, rubbish out”.

Politics – politicians often put into place policies that are “politically acceptable”. Even though a policy may be very good, because people will not like it, the policy never gets put into effect. Politicians are often swayed by policies which will earn them votes, not policies which are actually good.

In summary, we have learned: