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Government failure - Markets may fail. They may underprovide public goods.…
Government failure - Markets may fail. They may underprovide public goods. They may overprovide private goods which have negative externalities. They may cause prices to be too high because of asymmetric information. One response is for governments to intervene to correct these market failures. However, if markets can fail, so too can government. Government failure occurs when it intervenes in the market but this intervention leads to a net loss of economic welfare rather than a gain. So government failure arises when the total social costs arising from intervention are greater than the total social benefits which are created by that intervention. There is a number of reasons why government failure may occur
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Unintended Consequences
Some interventions can cause unintended consequences. For example when members of the EU implemented a common agricultural policy it caused a huge boom in agricultural production. The EU introduced a minimum price so that farmers from developing countries can contest with the low EU prices. This caused the high income farmers in rich countries to suffer a small loss in promise however it maximised social welfare as the lower income farmers developed economically.
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Excessive administrative costs:
Administrative costs of correcting the market failure are so large that it exceed the welfare benefit from the correction of market and government failure. For insurance the government may put into place a scheme to help the unemployed back into work.
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