What Causes Government Failure?
What causes government failure? Learn how poor information, incentives, costs and unintended effects can make intervention worsen resource allocation.
Government failure happens when government intervention makes the allocation of resources worse than it would have been without that intervention. It can be caused by poor information, weak incentives, political pressure, high costs or unintended effects.
Why can intervention go wrong?
Governments may lack accurate information about what people need or how they will respond to a policy. For example, a subsidy intended to encourage bus travel may mainly benefit people who already use buses, with little reduction in car journeys.
Decision-makers may also respond to incentives that differ from the public interest. A government might favour a policy with visible short-term benefits while overlooking its longer-term costs. Regulatory capture is a related risk: firms being regulated may influence decisions in their own favour.
Even a well-intended policy costs money to run and enforce. That spending has an opportunity cost: it cannot also be used for another purpose. Policies can have unintended consequences too. A maximum price below the market equilibrium may make a good more affordable for some consumers but create a shortage for others.
How do you judge whether it is government failure?
Compare the policy’s benefits and costs with what would probably have happened without it. A shortage or an administrative cost alone does not prove failure; the intervention may still deliver an overall improvement. In an exam answer, explain how a particular cause leads to a worse outcome, then consider whether the benefits might outweigh it.
For Cambridge International Economics, reasons for intervention and its methods sit in the AS Level topic Government microeconomy intervention. The definition, causes and consequences of government failure are studied explicitly at A Level.
