Government Failure

Due to all the market failures that are possible, you can see why sometimes an overseeing body may intervene by making sure the price mechanism works in societies best interests.  This is the government’s role in an economy, but, when trying to make things better, they can end up making things worse.

Unintentional Government Failures

Wrong Incentives For The Private Sector

Government policies may send out the wrong message to economic groups, even if they intend the best outcome fo the citizens. For instance, taxing the rich heavily to fund for the poor sends out the message that innovation/enterprise in unrewarding.

Also there is moral hazard, where government plans to reduce the risk of bankruptcy of major banks or road deaths have no effect. The reduction in the risk e.g bailouts or safety requirments are offset, due to lower chance of catastrophy, by more risky behavior being taken.

An interesting write up of Moral Hazard by a fellow blogger:

Ignorance of needs

Taxpayers money may be wasted providing things people do not need, or an advancing dominant firm may be burdened which wants the best for consumers. This is the most common form of failure and the biggest example is the socialist gvts of Eastern Europe up to late 1980’s.

Mistaken Cost Calculation

Providing merit and public goods such as infrastructure may be done without it actually needed, just the government advisors getting things wrong. Huge amounts of tax revenues can be spent in a project which ultimately fails, and turns out to be much more costly than forecast.

This type of intervention gone wrong follows The Law of Unintended Consequences. For every action, there will be a side effect which was not foecast when planned.

Intentional Failures

Yes, intentionally, which goes against a key assumption I have on ‘Controlling an Economy Governments Role’. Governments can be corrupt and may serve the interest of the few at the expense of the nation, one of the main reasons most economists give to why some countries cannot escape poverty.

Regulatory Capture

A body overseeing a dominant firm to protect consumers may be bribed to act in the firms interests, rather than the consumers. This sees the body doing almost no job whatsoever and staying a burden on the taxpayer. The FSA may have been ‘captured’ a few years ago.

Abuse of Power

A government may use the money it has, aswell as the legal system, to serve them and only them. Say there is a run down area and a police station is needed to greatly reduce crime. Many locals will stop being harassed, but instead, what does gvt do, it may spend that vital money as a gift for a connection, or to bribe the media into propoganda(gvt promotion), doing nothing helpful whatsoever.


Gvt may say it is necessary, and in very extreme cases it may be, but it is the biggest failure of them all. Especially civil war, which is going on in Uganda and is strongly linked to impoverished nations, no wonder, because the controlling body is failing them.

Public Choice Theory

Recent development in economics terms, and a main argument against Keynesian economics of larger government intervention.

Self Interest: The public sector, just like private enterprise, is also driven by self interested bureaucrats, and the assumption that they can be a selfless, paternal influence on failing markets is flawed.

Rather, public choice theory argues that incentives exist for the public sector to go against the interest of the nation by pursuing their own interests.

Public Incentives: Such greed often creates social betterment in the private sector, as it drives people to create better products and allocations. In the public sector, however, incentives that are needed for social betterment are misplaced, leading to state populism and innefficient use of resources.


One Response to Government Failure

  1. Pingback: My Space. « Zahablog's Economic Page

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