Government Intervention and Market Failure
Market failure occurs when the free market allocates resources inefficiently, resulting in a loss of social welfare.
Governments intervene to correct market failure and improve resource allocation.
→ Negative externalities: Reduce overproduction or overconsumption of goods that impose costs on others.
→ Positive externalities: Encourage the production or consumption of goods that benefit others.
→ Public goods: Provide goods that private firms may not supply because people can benefit without paying.
→ Imperfect information: Help consumers and producers make better-informed decisions.
→ Market power: Restrict anti-competitive behaviour and protect competition.
→ Resource depletion: Limit the excessive use of scarce natural resources.
The effectiveness of government intervention depends on the size of the market failure, the design of the policy, the response of consumers and producers, and the cost of implementation.
Specific and Ad Valorem Indirect Taxes
An indirect tax is a tax on expenditure on goods and services. It increases the cost of buying or producing the taxed product, depending on how the tax is imposed.
Governments may use indirect taxes to discourage the consumption or production of goods that create negative externalities.
Specific Indirect Tax
A specific tax is a fixed amount charged per unit of a product.
Example: A tax of ₹10 per packet of cigarettes.
How it works
→ A fixed tax is imposed on each unit sold.
→ The cost of supplying each unit increases by the tax amount, other things remaining equal.
→ The supply curve shifts upwards or to the left.
→ The market price paid by consumers generally rises.
→ The price received by producers after paying the tax generally falls.
→ The quantity traded decreases.
Advantages
→ The tax amount per unit is clear and predictable.
→ It can directly discourage consumption of harmful products.
→ It may raise government revenue.
Disadvantages
→ The tax may have a relatively large effect on cheaper products compared with their original price.
→ If demand is price inelastic, consumption may fall only slightly.
→ A specific tax loses purchasing power over time if inflation occurs and the tax is not adjusted.
Ad Valorem Indirect Tax
An ad valorem tax is charged as a percentage of the price of a product.
Example: A tax of 10% on a product selling for ₹1,000 results in a tax of ₹100 per unit, before considering any other taxes.
How it works
→ The tax is calculated as a percentage of the product’s price.
→ More expensive products pay a larger tax amount per unit.
→ The supply curve shifts upwards, with the size of the tax varying according to price.
→ The market price paid by consumers generally rises and quantity traded falls.
Advantages
→ Tax revenue rises when the taxable price rises, other things being equal.
→ It can be useful for products with a wide range of prices.
→ It may discourage consumption by increasing the price paid by consumers.
Disadvantages
→ Consumers may switch to cheaper alternatives.
→ The tax may increase prices substantially for expensive products.
→ The fall in consumption depends on price elasticity of demand.
Specific Tax vs Ad Valorem Tax
| Specific tax | Ad valorem tax |
|---|---|
| Fixed amount per unit | Percentage of price |
| Example: ₹10 per packet | Example: 10% of price |
| Tax per unit stays constant | Tax per unit rises with price |
| Inflation may reduce its real value | Tax amount rises when the taxable price rises |
Effectiveness of Indirect Taxes
Indirect taxes are particularly useful when the government wants to reduce consumption of demerit goods or production that creates external costs.
→ Higher prices encourage some consumers to reduce consumption.
→ Lower consumption may reduce external costs, such as pollution or health-related costs.
→ Tax revenue may finance public services or environmental programmes.
However:
→ If demand is inelastic, the reduction in consumption may be small.
→ The tax may be regressive because lower-income households may spend a larger proportion of their income on the taxed product.
→ Producers may pass much of the tax to consumers through higher prices.
→ If the tax is set too high, illegal markets or tax evasion may develop.
→ The tax must reflect the external cost reasonably well to correct the market failure effectively.
Subsidies
A subsidy is financial assistance provided by the government to producers or consumers to encourage the production or consumption of a particular good or service.
Subsidies may be used to encourage goods that create positive externalities, such as education, healthcare and public transport.
How a Subsidy Works
→ The government provides financial support per unit or towards the cost of production.
→ Producers’ costs decrease, other things remaining equal.
→ The supply curve shifts downwards or to the right.
→ The price paid by consumers generally falls.
→ The quantity traded increases.
→ If the product generates external benefits, greater consumption or production may improve social welfare.
Example: A government subsidises public transport operators, allowing them to charge lower fares and encourage more people to use buses.
Advantages of Subsidies
→ Encourages consumption: Lower prices make merit goods more affordable.
→ Corrects under-consumption: Greater use of education or healthcare may create benefits for society beyond the individual consumer.
→ Supports producers: Subsidies may help firms adopt cleaner technologies or produce socially beneficial goods.
→ Creates employment: Expansion of subsidised industries may increase demand for workers.
→ Improves access: Low-income households may be better able to afford essential services.
Disadvantages of Subsidies
→ Government expenditure: Subsidies must be financed through taxation, borrowing or other public funds.
→ Opportunity cost: Money spent on one subsidy cannot be used for other priorities.
→ Risk of overproduction: If the subsidy is excessive, output may exceed the socially efficient level.
→ Dependency: Producers may become reliant on government assistance.
→ Inefficiency: Firms may have less incentive to reduce costs if subsidies continue regardless of performance.
Effectiveness of Subsidies
Subsidies can correct market failure when they encourage activities with external benefits. Their effectiveness depends on whether they are large enough to change behaviour without creating excessive production or consumption.
Price Controls
Price controls are government restrictions on the prices that can be charged or paid for particular goods and services.
The two main types are maximum prices and minimum prices.
Maximum Price
A maximum price, or price ceiling, is the highest legal price that a seller may charge.
To affect the market, it is normally set below the equilibrium price.
Example: A government sets a maximum rent for certain properties to improve housing affordability.
How it works
→ The maximum price is below the equilibrium price.
→ Consumers demand more because the price is lower.
→ Producers supply less because selling becomes less profitable.
→ Quantity demanded exceeds quantity supplied.
→ A shortage develops.
Advantages of a Maximum Price
→ Makes essential goods more affordable for some consumers.
→ May protect low-income households from high prices.
→ Can limit sudden price increases during emergencies.
Disadvantages of a Maximum Price
→ Shortages may develop.
→ Some consumers may be unable to obtain the product.
→ Producers may reduce quality or stop supplying the market.
→ Black markets may develop if consumers are willing to pay more than the legal maximum.
→ Government monitoring and enforcement may be costly.
Minimum Price
A minimum price, or price floor, is the lowest legal price that may be charged or paid.
To affect the market, it is normally set above the equilibrium price.
Example: A minimum price for an agricultural product may be used to support farmers’ incomes.
How it works
→ The minimum price is above the equilibrium price.
→ Producers are willing to supply more.
→ Consumers demand less.
→ Quantity supplied exceeds quantity demanded.
→ A surplus develops.
Advantages of a Minimum Price
→ May protect producer incomes.
→ Can support farmers or workers in certain markets.
→ May discourage consumption of harmful goods if a higher minimum price is imposed.
Disadvantages of a Minimum Price
→ Surpluses may develop.
→ Some output may remain unsold.
→ Consumers may pay higher prices.
→ If the government buys the surplus, public expenditure may increase.
→ Producers may become less efficient if they are protected from market pressures.
Effectiveness of Price Controls
Price controls may improve affordability or support producer incomes, but they can distort the price mechanism.
→ Maximum prices can make goods cheaper but may create shortages.
→ Minimum prices can support incomes but may create surpluses.
Their effectiveness depends on enforcement, the size of the price restriction and whether the government addresses the resulting shortage or surplus.
Production Quotas
A production quota is a legal limit on the amount of a good that a producer or group of producers may produce.
Governments may use quotas to conserve scarce resources or reduce production that creates negative externalities.
Example: A government sets a maximum annual catch for fishing vessels to protect fish populations.
How Production Quotas Work
→ The government sets a maximum permitted level of output.
→ Producers cannot legally produce beyond the quota.
→ Total market supply is restricted.
→ The market price may rise.
→ Output and resource use may fall.
→ If production creates external costs or depletes a natural resource, the quota may reduce the resulting damage.
Advantages
→ Limits excessive resource extraction.
→ Can protect renewable resources from overuse.
→ May reduce pollution associated with production.
→ Provides a clear legal limit that can be monitored.
Disadvantages
→ A quota set too low may cause excessive shortages and higher prices.
→ Producers may attempt to exceed their quotas illegally.
→ Monitoring output can be expensive.
→ Quotas may protect inefficient producers from competition.
→ The government may lack accurate information about the socially efficient level of production.
Effectiveness
Quotas are useful when the government needs to impose a definite limit on production or resource use. However, their success depends on setting appropriate limits and preventing illegal production.
Prohibitions and Licences
Governments may prohibit certain activities or require licences before individuals or firms can undertake them.
Prohibitions
A prohibition is a legal ban on a particular activity, product or behaviour.
Examples:
→ Banning the sale of certain dangerous products.
→ Prohibiting the disposal of toxic waste into rivers.
→ Banning the hunting of protected endangered species.
How prohibitions work
→ The activity is made illegal.
→ Legal supply or consumption is eliminated or restricted.
→ The harmful external costs may decrease.
Advantages
→ Can prevent activities that create serious harm.
→ May protect public health, safety and the environment.
→ Provides a clear legal standard.
Disadvantages
→ Illegal markets may develop.
→ Enforcement can be expensive.
→ People may evade the ban if demand remains strong.
→ A broad prohibition may restrict legitimate activities unnecessarily.
Licences
A licence is official permission to carry out a particular activity, usually subject to conditions.
Examples:
→ Licences for fishing or extracting minerals.
→ Operating licences for certain businesses.
→ Permits for handling hazardous substances.
How licences work
→ The government sets eligibility requirements or limits the number of licences.
→ Only approved individuals or firms may undertake the activity.
→ Licence conditions can restrict output, methods or locations.
→ The government can monitor compliance and penalise violations.
Advantages
→ Allows the government to control potentially harmful activities.
→ Can improve safety and environmental standards.
→ Makes it easier to identify and monitor operators.
Disadvantages
→ Licence applications and inspections create administrative costs.
→ Restrictions may prevent new firms from entering the market.
→ Corruption or unfair allocation may occur.
→ Licence holders may gain market power if the number of licences is too limited.
Effectiveness
Prohibitions are most appropriate when an activity creates unacceptable harm that cannot reasonably be controlled through less restrictive measures. Licences are useful when an activity can continue safely under monitored conditions.
Regulation and Deregulation
Regulation
Regulation occurs when the government establishes and enforces rules that firms and individuals must follow.
Regulations may address pollution, product safety, working conditions, consumer protection and anti-competitive behaviour.
Example: A government requires factories to install equipment that reduces harmful emissions.
How regulation works
→ Legal standards are introduced.
→ Firms must change their behaviour to comply.
→ The harmful activity may decrease.
→ Social costs may fall.
Advantages of Regulation
→ Protects consumers and workers.
→ Reduces harmful externalities.
→ Improves product safety and environmental standards.
→ Can prevent misleading business practices and anti-competitive behaviour.
Disadvantages of Regulation
→ Compliance increases business costs.
→ Government inspections and enforcement require resources.
→ Excessive regulation may discourage entry, innovation or investment.
→ Firms may find ways to evade the rules.
Deregulation
Deregulation occurs when the government removes or reduces existing rules and restrictions.
It is often intended to increase competition, reduce costs and encourage business activity.
Example: A government removes unnecessary licensing requirements that prevent new firms from entering a market.
Advantages
→ Reduces administrative and compliance costs.
→ May encourage new businesses to enter the market.
→ Can increase competition and consumer choice.
→ May improve innovation and efficiency.
Disadvantages
→ Removing essential safety rules may expose consumers and workers to harm.
→ Environmental damage may increase if pollution controls are removed.
→ Firms may gain greater market power if competition rules are weakened.
→ Information problems may become more serious if consumer protections are removed.
Effectiveness
Regulation is useful when rules are needed to protect society or correct market failure. Deregulation can improve efficiency when unnecessary restrictions prevent competition, but removing safeguards may create new market failures.
Direct Provision
Direct provision occurs when the government itself provides goods or services rather than relying entirely on private firms.
It is particularly important for public goods and essential services that may be underprovided by the market.
Examples:
→ National defence.
→ Police services.
→ Public roads.
→ Government schools and hospitals.
How Direct Provision Works
→ The government allocates public funds to provide a service.
→ The service is made available to the population, often free or at a subsidised price.
→ Access may increase, particularly for people unable to afford private provision.
→ Social benefits may increase if the service improves education, health or public safety.
Advantages
→ Ensures provision of important services.
→ Can improve access for low-income households.
→ Supports the provision of public goods that private firms may not supply adequately.
→ Allows the government to prioritise social benefits rather than profit alone.
Disadvantages
→ Requires public expenditure.
→ Funds have an opportunity cost.
→ Government providers may face weak incentives to reduce costs.
→ Poor management may lead to waste or low-quality services.
→ Demand may exceed available capacity, resulting in waiting lists.
Effectiveness
Direct provision is especially useful where private markets fail to supply essential goods and services adequately. Its effectiveness depends on funding, management, service quality and the needs of the population.
Pollution Permits
Pollution permits are licences that allow firms to emit a specified amount of pollution.
Under a tradable permit system, the government sets an overall limit on emissions and allows firms to buy and sell permits.
This is also known as a cap-and-trade system.
How Pollution Permits Work
→ The government sets a maximum total level of permitted emissions.
→ Firms receive or purchase permits allowing them to emit a specified quantity.
→ Firms that can reduce pollution at a relatively low cost may reduce their emissions and sell unused permits.
→ Firms that face higher pollution-reduction costs may purchase permits from other firms.
→ Trading allows pollution reduction to take place where it is relatively inexpensive, while the overall cap limits total permitted emissions.
Example: A factory that installs cleaner technology reduces its emissions and sells unused permits to another factory.
Advantages
→ The emissions cap provides a limit on total permitted pollution.
→ Firms have a financial incentive to reduce emissions.
→ Trading can reduce the overall cost of achieving the emissions target.
→ Firms can choose the most suitable pollution-reduction methods.
Disadvantages
→ Setting the correct emissions cap requires reliable information.
→ Monitoring emissions and preventing fraud can be costly.
→ If too many permits are issued, the price of permits may be too low to encourage sufficient pollution reduction.
→ If too few permits are available, compliance costs may rise sharply.
→ Pollution may remain concentrated in particular areas even if total emissions are controlled.
Effectiveness
Pollution permits can correct negative externalities by limiting emissions and creating an incentive to reduce pollution. Their effectiveness depends on the strictness of the cap, accurate measurement, enforcement and the operation of the permit market.
Property Rights
Property rights are legally recognised rights to own, use, control and transfer resources or assets.
Clearly defined property rights can help correct market failure by giving individuals and firms an incentive to consider the costs and benefits of their actions.
How Property Rights Can Correct Market Failure
→ Unclear ownership may encourage the excessive use of shared resources.
→ Clear rights establish who controls a resource and who is responsible for its use.
→ Owners may have an incentive to conserve resources because they bear more of the consequences of depletion.
→ Legal rights can allow affected parties to negotiate, seek compensation or challenge harmful activities.
Example: If ownership and access rights over a forest are clearly defined and effectively enforced, the owner may have a stronger incentive to protect its long-term value.
Advantages
→ May discourage overuse of scarce resources.
→ Can encourage conservation and investment.
→ May clarify responsibility for environmental damage.
→ Can make negotiation and compensation possible.
Disadvantages
→ Defining and enforcing property rights may be difficult and costly.
→ It may be difficult to assign rights over resources such as clean air or the open ocean.
→ People with limited financial resources may struggle to protect their rights.
→ Owners may still cause external costs if they do not bear all the consequences of their actions.
Effectiveness
Property rights are most useful when ownership can be clearly defined, enforced and transferred. They may be less effective when many people are affected, transaction costs are high or the harm is difficult to measure.
Nationalisation and Privatisation
Nationalisation
Nationalisation occurs when the government takes ownership and control of a privately owned business or industry.
It may be used where the government believes that an industry is essential, strategically important or inadequately served by private markets.
Example: A government takes ownership of a major utility provider.
Advantages
→ The government may prioritise access and public welfare over profit.
→ Essential services may be provided to areas that private firms consider unprofitable.
→ The government may coordinate investment across an industry.
→ It may be easier to pursue long-term social objectives.
Disadvantages
→ Government-owned firms may face weaker incentives to reduce costs.
→ Political priorities may influence commercial decisions.
→ Losses may require public funding.
→ Bureaucracy may delay decisions and innovation.
Privatisation
Privatisation occurs when a government transfers ownership or control of a state-owned business to private owners.
Example: A government sells shares in a state-owned company to private investors.
Advantages
→ Private ownership may strengthen incentives to reduce costs.
→ Competition and investment may increase.
→ The government may receive revenue from the sale.
→ Management may become more responsive to consumers and market conditions.
Disadvantages
→ A private firm may prioritise profit over access or affordability.
→ Prices may rise if competition is weak.
→ Services in less profitable areas may receive less investment.
→ If a monopoly is privatised without effective regulation, consumers may remain exposed to market power.
Effectiveness
Nationalisation may help achieve social objectives where private provision is inadequate, while privatisation may improve efficiency where commercial incentives and competition are effective.
Neither approach automatically corrects market failure. Outcomes depend on competition, regulation, management and the objectives pursued.
Provision of Information
Provision of information occurs when the government supplies accurate information to help consumers and producers make informed decisions.
It can correct market failure caused by imperfect information, particularly when consumers underestimate the costs or benefits of their choices.
Examples:
→ Public health campaigns explaining the risks of smoking.
→ Nutrition labels on packaged food.
→ Information campaigns about vaccination.
→ Energy-efficiency labels on electrical appliances.
How Information Provision Works
→ Consumers receive information about a product’s costs, benefits or risks.
→ Their understanding improves.
→ They may change their consumption decisions.
→ Consumption of harmful goods may fall, while consumption of beneficial goods may rise.
→ Resource allocation may move closer to the socially efficient level.
Advantages
→ Helps consumers make better-informed decisions.
→ May reduce harmful consumption without directly restricting choice.
→ Can be relatively inexpensive compared with some direct interventions.
→ Allows consumers to retain freedom of choice.
Disadvantages
→ Consumers may ignore the information.
→ Some people may not understand complex messages.
→ Firms may provide misleading information unless claims are monitored.
→ Behaviour may not change if habits, addiction, income constraints or social pressures remain strong.
Effectiveness
Information provision is useful when poor decisions result mainly from a lack of knowledge. It is less effective when consumers already understand the consequences but cannot afford alternatives or are strongly influenced by habits or addiction.
Behavioural Insights and Nudge Theory
Behavioural insights use evidence about how people actually make decisions, including the influence of habits, emotions, social pressures and mental shortcuts.
A nudge is a change in how choices are presented that encourages people towards a particular decision without removing their freedom to choose or significantly changing the financial incentives.
Examples of Nudges
1. Default options
→ People are automatically enrolled in a beneficial scheme unless they choose to opt out.
→ Participation may increase because many people accept the default option.
Example: Automatic enrolment in a pension savings scheme, where permitted by law.
2. Social norms
→ People are informed about what others commonly do.
→ They may be encouraged to adopt similar behaviour.
Example: An electricity bill tells a household that its energy use is higher than that of comparable households.
3. Making beneficial choices easier
→ Healthy or environmentally friendly options are placed in more convenient locations.
→ People may choose them more frequently because less effort is required.
Example: Placing healthier food at the front of a school canteen.
4. Reminders and prompts
→ Messages remind people to take an action they intend to take.
→ This may reduce missed appointments or forgotten payments.
Example: Text reminders encouraging people to attend medical appointments.
Advantages of Nudge Theory
→ May change behaviour without banning choices.
→ Can be relatively inexpensive to implement.
→ Preserves freedom of choice.
→ May be useful when people understand what they should do but fail to act consistently.
Disadvantages of Nudge Theory
→ Nudges may have only a small effect on behaviour.
→ People may ignore or become accustomed to repeated messages.
→ Behaviour may change temporarily rather than permanently.
→ The design of a nudge may reflect the priorities of the organisation creating it rather than the preferences of the individual.
→ Nudges may not solve problems caused by poverty, high prices or a lack of alternatives.
Effectiveness
Nudges can be effective when decisions are strongly influenced by defaults, convenience or social norms. They are less likely to be sufficient on their own when a market failure requires a strict limit, substantial financial support or a change in the availability of goods.
Government Failure in Microeconomic Intervention
Definition of Government Failure
Government failure occurs when government intervention leads to a less efficient allocation of resources than would otherwise occur, reducing economic or social welfare.
It can happen when a policy fails to correct market failure or creates new problems that outweigh its benefits.
Example: A subsidy intended to encourage clean energy is set too high, leading to excessive production and substantial public expenditure without a proportionate improvement in environmental outcomes.
Causes of Government Failure
Inadequate Information
→ Governments may not know the exact size of an external cost or external benefit.
→ A tax may be set too high or too low.
→ A quota may restrict output excessively or fail to limit environmental damage sufficiently.
Consequence: Resources may remain misallocated despite intervention.
Administrative and Enforcement Costs
→ Monitoring firms and enforcing regulations require staff, technology and funding.
→ Complex policies may be expensive to operate.
→ Resources spent on administration cannot be used for other public services.
Consequence: The total cost of intervention may exceed its benefits.
Unintended Consequences
→ Consumers and producers may react in unexpected ways.
→ A maximum price may create shortages.
→ A high tax may encourage illegal trading or substitution towards other harmful products.
→ A subsidy may encourage excessive production.
Consequence: The policy creates new inefficiencies or shifts the problem elsewhere.
Political Pressures
→ Governments may favour policies that appeal to particular groups rather than maximise social welfare.
→ Support may be directed towards politically influential industries.
→ Policies may be designed to gain short-term approval rather than achieve long-term efficiency.
Consequence: Resources may be directed towards less productive uses.
Conflicting Objectives
→ A government may want to protect jobs, keep prices low, reduce pollution and balance its budget simultaneously.
→ These objectives may conflict.
Example: A government may keep support for a polluting industry to protect employment, even when reducing pollution would improve environmental welfare.
Consequence: The chosen policy may not achieve the most efficient outcome.
Weak Incentives in Government-Owned Organisations
→ Managers may face less pressure to reduce costs if funding continues despite poor performance.
→ Political priorities may affect investment decisions.
→ Inefficient organisations may continue operating because they are protected from competition.
Consequence: Production costs may remain high and resources may be wasted.
Regulatory Capture
Regulatory capture occurs when a regulatory body begins to serve the interests of the industry it regulates rather than the wider public.
→ Firms may influence the rules intended to control them.
→ Regulations may become weaker or favour established businesses.
→ New firms may face unnecessary barriers to entry.
Consequence: Competition may decrease and market failure may persist.
Time Lags
→ Policies may take time to design, implement and affect behaviour.
→ Market conditions may change before the policy becomes effective.
→ A measure that was appropriate earlier may no longer suit current conditions.
Consequence: Intervention may be ineffective or create unnecessary costs.
Inflexibility and Poor Policy Design
→ Uniform rules may not suit firms with different costs or circumstances.
→ A regulation may impose excessive costs on small firms.
→ A subsidy may reward firms that would have undertaken the activity anyway.
Consequence: The policy may waste resources or create unfair advantages.
Consequences of Government Failure
→ Misallocation of resources: Resources may be diverted from more socially valuable uses.
→ Higher costs: Taxpayers and businesses may face additional financial burdens.
→ Reduced consumer welfare: Shortages, higher prices or lower-quality goods may result.
→ Excessive production or consumption: Poorly designed subsidies or controls may distort market decisions.
→ Reduced competition: Unnecessary licensing or regulations may protect existing firms from new entrants.
→ Lower productive efficiency: Weak incentives may allow costs to remain unnecessarily high.
→ Environmental damage: Inadequate regulation or ineffective enforcement may fail to reduce external costs.
→ Opportunity cost of public spending: Funds used on an ineffective policy cannot be used for other purposes.
→ Loss of confidence: Repeated policy failures may reduce public trust in government programmes.
Evaluating the Effectiveness of Government Intervention
The success of a policy depends on whether it corrects the original market failure and whether the benefits exceed the costs of intervention.
When evaluating a policy, consider the following:
1. Size of the market failure
→ A major external cost may justify stronger intervention than a small one.
2. Accuracy of government information
→ Reliable information helps the government set appropriate taxes, subsidies, quotas and regulations.
3. Price elasticity of demand and supply
→ If demand is inelastic, a tax may raise revenue but produce only a small fall in consumption.
→ If supply is inelastic, producers may find it difficult to adjust output when taxes or regulations change.
4. Costs of implementation
→ A policy may be ineffective if monitoring, administration and enforcement are too expensive.
5. Behavioural responses
→ Consumers and producers may change their behaviour in ways the government did not anticipate.
6. Distributional effects
→ A policy may improve overall efficiency but place a disproportionate burden on low-income households.
7. Long-term effects
→ Some measures may have immediate costs but provide long-term benefits, such as cleaner technology or improved education.
8. Possibility of government failure
→ Policymakers should consider whether the intervention could create shortages, surpluses, excessive costs or unintended incentives.
Overall conclusion: Government intervention can improve resource allocation when it corrects a clear market failure and the resulting social benefits exceed the costs. However, intervention is not automatically successful. Governments need accurate information, suitable policy design, effective enforcement and regular evaluation to minimise government failure.