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Reasons For Government Failure

Government failure occurs when a government intervention intended to improve economic welfare instead reduces it. There are several reasons for this, including that governments have inadequate information, interventions have high administrative costs, governments face conflicting objectives, special interest groups can influence regulations, and interventions can distort markets and harm other groups. For example, buffer stock schemes meant to stabilize prices can end up creating excess supply that lowers global prices and farmer incomes.

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Fathimath Shiuna
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73 views1 page

Reasons For Government Failure

Government failure occurs when a government intervention intended to improve economic welfare instead reduces it. There are several reasons for this, including that governments have inadequate information, interventions have high administrative costs, governments face conflicting objectives, special interest groups can influence regulations, and interventions can distort markets and harm other groups. For example, buffer stock schemes meant to stabilize prices can end up creating excess supply that lowers global prices and farmer incomes.

Uploaded by

Fathimath Shiuna
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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GOVERNMENT FAILURE

It occurs when government intervenes in the market but this intervention leads to loss of
economic welfare rather than gain.

Reasons for government failure


# Inadequate information.

Government, like any economic agents, rarely posses completes information on


which to base a decision. In some cases, the information available is positively misleading.
Therefore government may take wrong policy response to a problem.

# Administrative costs:

Sometimes the administrate costs of correcting market failure is so large that it


outweighs the welfare benefit from the correction of market failure.

Eg: the storage cost for buffer stock scheme is very large. So the gains from buffer stock scheme
maybe low to compare to the cost.

# Conflicting objectives:

Government face conflicting objectives for example they may want to cut taxes
but increase spending on defense. Every decisions made by the government has an opportunity
cost. Sometimes, a decision is made where the welfare gain from alternative forgone would have
been even higher. In such cases, government may make wrong policy decision. Choosing the
option which gives lower economic welfare due to lack of information or they may deliberately
choose this option, because they wish to reward their supporters who voted for them.

# Regulatory capture

The groups such as monopolists’ earing abnormal profit or polluter damaging the
environment can strongly influence the way they are being regulated to their own advantage by
lobbing the government for example by bribing.

# Market distortions

In some cases, government intervention to correct market failure leads to the


creation of far more serious market failure. For example buffer stock schemes, minimum price
schemes lead to excess supply. This excess supply maybe dumped into other world markets at
lower prices. This leads to lower income for markets at lower prices. This leads to lower income
form world farmers, destroying the market for their produce.

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