Causes of Government Failure

1) Political self-interest

Politicians may feel the need to spend in the run up to an election. In the long-run this may do more harm to the economy.

2) Imperfect Information

The government may not have enough information to properly tackle market failure, intervention may therefore lead to a worsening of the situation. For example the construction of a wind farm may appear benefitial but it may lead to a larger burden of noise pollution.

3) Unintended Consequences

Intervention by the government to correct market failure may also have unforeseen consequences that worsen the market failure. For example the introduction of a minimum price floor may encourage a black market to emerge.

4) Regulatory Capture

Another source of market failure is regulatory capture. This is where a firm or institution influences the decision of the government or an administrative body. For example a large company may work closely enough with the government to influence the level of corporation tax.