3.9 GOVERNMENT FAILURE
Government intervenes in markets all the time but sometimes the intervention that governments take does not have the intended effect. The intervention does not produce the desired outcome or creates a new problem. This is known as government failure, as the government has failed to solve the problem.
Causes of government failure:
Causes of government failure:
- The law of unintended consequences. This is where government policy creates a new problem that did not exist before. For example, the banning of cigarettes could lead to a black market for cigarettes. This is a new problem that then has to be addressed by governments. Unintended consequences can be very costly and the consequences can take many years to overcome.
- Political self-interest. Some decisions are made for political reasons rather than economic ones. For example, a new runway at Heathrow is a very political scheme because politicians who do not live near the airport are in favor of it but local MPs are not keen for it. This may result in it not going ahead, even though it may be in the interest of the country (in economic terms).
- Policy myopia. Political parties get re-elected every 5 years. These small cycles result in politicians trying to provide quick fixes to a problem rather than taking on a longer-term view. Also, a government may adopt policies that are popular but have little economic sense. For example, pensions are a huge issue and the problem is only going to get worse in the future as life expectancy is expected to rise. It would be a politically unpopular decision to increase the age of retirement, but at the same time the UK may have serious funding trouble if nothing is done.
- Imperfect information. If a government makes a decision on a program and it has imperfect information then it is likely that there will be government failure later along the line.
- Disincentives and conflicting objectives. Some Laissez faire economists argue that attempts to reduce inequality worsen incentives for economic agents. For example, a high level of income tax may reduce the incentives for individuals to work longer hours as they receive less monetary benefit. Also, minimum wages artificially raise wages and can lead to wage unemployment. The government would argue that minimum wages are needed otherwise there would be exploitation of workers and workers need to be protected.
- Inefficiencies. Many believe that nationalisation leads to inefficiencies as there is no incentive to produce profit. Privatisation is often argued for with the reason that market forces will make the company run more efficiently.
- Administration costs. Government failure can also arise due to high administration costs. This is closely linked to inefficiency. Governments are notoriously linked to bureaucracy which is costly and tends to take a lot of time.
- Another government failure would be inaction. If the government does not act before the market failure and a market fails, then many would argue that this is a government failure because the government should have taken action and stepped into market before it failed. Also, government failure could also arise when the government chooses to take no action, even when the market has failed.