Causes of Government Failure
Idea
Government failure — intervention leaving society worse off than the free market — arises from five recurring causes. They are the standard reservoir of evaluation when judging whether a corrective policy will actually raise welfare.
Mechanism
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Lack of information. Governments rarely have perfect information, so they may choose the wrong policy or apply the right one to the wrong degree — over-taxing an industry whose external cost they have over-estimated, for instance.
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Lack of compliance. A policy’s effect depends on the target audience complying. Securing compliance requires monitoring consumers and producers, which is administratively costly and erodes productive efficiency.
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Bureaucratic inefficiency. As a large, many-branched organisation, the government can be slow: information moves sluggishly between departments, producing time lags in implementation that blunt a policy’s effect.
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Policy conflicts. The government pursues several goals at once — efficiency, equity, growth, price stability, low unemployment — and a measure that advances one can set back another (pursuing growth at the cost of greater pollution).
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Political factors. A government may prioritise political support over welfare, favouring popular policies that are not the most economically sound and so creating greater inefficiency.
Considerations
These causes are why the existence of a market failure does not guarantee that intervention is warranted: the relevant comparison is always the deadweight loss with intervention against the deadweight loss without it. Information failure is the cause that recurs across almost every microeconomic policy in this sub-theme — a tax, a permit cap, a subsidy, or direct provision each presupposes knowledge the government may not have.