Government failure
Intervention causes more inefficient allocation — net welfare loss.
Government failure
Key definitions
Distortion of price signals
Intervention significantly affects price messages.
Unintended consequences
Outcomes not foreseen by policymakers.
Administration costs
Cost of designing, monitoring and enforcing policy.
Information gaps
Government lacks data for rational decisions.
Regulatory capture
Regulator acts in firms' interests not consumers'.
Shadow markets
Unregulated illegal markets e.g. after price ceilings.
Allocative inefficiency
Market in disequilibrium.
Net welfare loss
Overall society worse off after intervention.
Key concepts
Intervention may create bureaucracy and perverse incentives.
Rent controls may reduce housing supply long run.
Always weigh government failure against market failure.
Relevant tips
- Evaluate both sides — market failure vs government failure.