Study Notes
Government failure occurs when government intervention in markets leads to a net welfare loss instead of correcting market failures. This can happen due to information gaps, unintended consequences, excessive administrative costs, and conflicting objectives.
- Government Failure — when intervention leads to a new loss of economic welfare. Example: Social costs exceed social benefits from intervention.
- Information Gaps — lack of necessary information for decision-making. Example: Incorrect policies implemented due to missing data.
- Unintended Consequences — unexpected negative outcomes from intervention. Example: Common Agricultural Policy led to higher food prices.
- Excessive Administrative Costs — high costs outweigh welfare benefits. Example: Resources wasted in ineffective market corrections.
- Conflicting Objectives — decisions benefit one market at another's expense. Example: Opportunity cost in government decisions.
Exam Tips
Key Definitions to Remember
- Government Failure
- Information Gaps
- Unintended Consequences
- Excessive Administrative Costs
- Conflicting Objectives
Common Confusions
- Confusing government failure with market failure
- Assuming all government interventions are beneficial
Typical Exam Questions
- What is government failure? Government failure is when intervention leads to a net welfare loss.
- How can information gaps cause government failure? Lack of information can lead to incorrect policies and more welfare loss.
- What are unintended consequences? Unintended consequences are unexpected negative outcomes from intervention.
What Examiners Usually Test
- Understanding of causes of government failure
- Ability to explain examples of government failure
- Differentiating between market failure and government failure