Government intervention to resolve market failures can also fail to achieve a socially efficient allocation of resources. Government failure is a situation where government intervention in the economy to correct a market failure creates inefficiency and leads to a misallocation of scarce resources.
Reasons for government failure
- Lack of incentives: In the public sector, there is limited or no profit motive. Because workers and managers lack incentives to improve services and cut costs it can lead to inefficiency. For example, the public sector may be more prone to over-staffing. The government may be reluctant to make people redundant because of the political costs associated with unemployment.
- Poor information, politicians may have poor information about the type of service to provide. Politicians may not be experts in their department, but concentrate on their political ideology.
- Political interference e.g. politicians may take the short term view rather than considering long term effects
- Administration cost of government bureaucracy in running public services
- Moral hazard. The government may offer a guarantee to all bank deposits to protect financial system, but this could encourage banks to take risks – because they know they can be bailed out by the government.
Overcoming government failure
There are various things the government can try and do to overcome government failure- Give performance targets / profit incentives
- Competitive tendering – where public sector bodies face competition from the private sector for the right to run a public service.
- Employing outside private sector consultants to make decisions about how to cut costs.
- See also: How to overcome government failure
It should be remembered many public services are not subject to the same profit goals. It is difficult to give a profit motive in health or education because the goal is not profit but quality of service.
Further reading
