21. Government Failure
Friday, September 11, 2020 12:59 PM
Government Failure:
Markets may fail due to a no. of reasons:
• They may underprovide public goods
• They may overprovide private goods which has negative externalities
• They may cause prices to be too high due to asymmetric information
One response to intervene these market failures is government intervention
• However, if markets can fail, so too can government
Government Failure - occurs when gov intervention leads to a net welfare loss compared to free market solution
• Gov failure arises when the total social costs arising from intervention are > than the total social benefits which
are created by that intervention
There is a no. of reasons why gov failure may occur:
Distortion of Price Signals:
Some types of gov intervention change price signals in the market
• e.g. many govs intervene in their domestic agricultural markets to support farmers. One way is to impose
tariffs (taxes) on a product like wheat being imported into the country
Economics Page 1
Friday, September 11, 2020 12:59 PM
Government Failure:
Markets may fail due to a no. of reasons:
• They may underprovide public goods
• They may overprovide private goods which has negative externalities
• They may cause prices to be too high due to asymmetric information
One response to intervene these market failures is government intervention
• However, if markets can fail, so too can government
Government Failure - occurs when gov intervention leads to a net welfare loss compared to free market solution
• Gov failure arises when the total social costs arising from intervention are > than the total social benefits which
are created by that intervention
There is a no. of reasons why gov failure may occur:
Distortion of Price Signals:
Some types of gov intervention change price signals in the market
• e.g. many govs intervene in their domestic agricultural markets to support farmers. One way is to impose
tariffs (taxes) on a product like wheat being imported into the country
Economics Page 1
