Government Intervention
Sometimes the free market mechanism fails to allocate resources efficiently (Market Failure).
In order to solve the market failure, the government can intervene through various ways.
Government Failure
- Government Failure occurs when an intervention leads to a deeper market failure, or worse, a new market failure
- Intervention creates further inefficiencies, a missallocation of resources and a loss of economic / social welfare
- Policies may have damaging long-term consequences for the economy or society
- Policies may be ineffective in meeting their stated aims
- Policies may create more losers than winners
- Can happen if a policy decision fails to create enough of an incentive to change people's behaviour
Possible Causes
- Political Self-interest
- Policy myopia - Quick fixes
- Regulatory Capture
- Where regulation is designed / influenced by the group it is targetting
- Information failure
- Disincentive effects
- High enforcement / compliance costs
- Conflicting policy objectives
- Minimum carbon price vs UK competitiveness
- Bureaucracy / Read tape
- Costs of enforcement may hurt enterprise and incentives
- Unintended consequences
- Black markets
- Bank bail outs -> causes moral hazard
- People circumvent new laws