Government Failure

What is government failure? Definition

When the market fails, the government has to step in to alleviate the situation. However, in some cases, government intervention can bring more harm than good.

Let's look at an example of what a government failure might be like:

One economic consequence caused by the intervention of the government is the distortion of prices. For example, to ensure farmers a minimum income, the government can provide subsidies for domestic agricultural products or enact tariffs on imported goods from other countries.

While farmers can earn more from their goods, this can increase food prices for consumers and create an extra burden for them. In addition, the tariffs will make exported goods more expensive and discourage healthy global competition.

Sources and reasons for government failure

There are a number of reasons why government failures occur. Some of these reasons are highlighted in Figure 1 below:

Fig 1. Sources of government failure

Let's take a look at each of these reasons in more detail.

Imperfect information

Imperfection information happens when the government lacks the necessary information to make decisions regarding a market failure. This results in the enactment of a policy that exacerbates the issue instead of resolving it.

Political interests

Given that government officials are ordinary humans, they can implement policies that degrade public welfare for their own personal gains. In economics, this is called the public choice theory.

Conflicting objectives

The implementation of one policy can come at the expense of another. In this case, the government has to make a trade-off for a policy that it believes will bring more social benefits. That said, it might happen that the policy fails to yield the expected results and causes a government failure.

High administrative costs

Correcting market failure might require substantial amounts of money. When the costs exceed the intended initial funds, government failure can occur.

Examples of government failure in history

Now that we've learned what government failure is and what causes it, let's look at several real-life examples of government failures.

White Elephant Project

The White Elephant Project was the name given to the Concorde Supersonic Aircraft project. This was a joint project by the British and French governments. The project was seen as a 'lofty endeavour' since the aircraft was the first computer-controlled engine in the air, a huge achievement at the time.

The project started in 1962. The first commercial flight took place on 21 January 1976. The project was a great success until a tragic crash in Paris in 2000 killed 113 passengers. One year later, roughly £71 million had been raised to improve the safety protocols but to no avail. The aircraft was shut down the following year.¹

Fig. 2 - Official handover ceremony of the first commercial Concorde in 1976

The Concorde project was put down due to its heavy oil consumption and the extensive funds to improve safety standards while maintaining high-class onboard service. This is the case of government failure that stems from administrative costs and unpredictable events.

Common agricultural policy (CAP)

The CAP was a policy set up as a result of the Treaties of Rome that united the European market. The policy aimed to improve agricultural production in the region while securing farmers an adequate income. However, contrary to expectations, the policy turned out to be a failure.

During the 1970s and 1980s, the majority of EU funds went to CAP, yet the consumers still pay much higher prices for foods than before the CAP was implemented. The policy also put farmers in countries outside of the EU such as the USA and New Zealand in struggle as their products couldn't compete with the below-world-level prices of the EU agricultural products.

How to avoid government failure

Without timely solutions, government failure can result in a significant loss of economic welfare. Here are some common ways to revert the outcome of government failure:

Fig. 3 - Solutions to government failure

Adopt competitive tendering

To avoid the abusive behaviour of an influential public service company, the government can adopt competitive tendering: bids submitted by different firms to win the right to implement a certain project. Competitive tendering gives the private-sector and public-sector firms the same chance to compete while motivating both parties to innovate and improve product quality to avoid being outperformed by the other.

Reduce unnecessary costs

One of the main causes for government failure when correcting a market failure is running out of funds. To prevent this, the government can hire a professional to analyse and cut unnecessary costs in implementing the policy. With lower costs of execution, the government plan will have a higher chance to succeed or lasts long enough to exceed all the social costs.

Delegate tasks and decisions

One common mistake for executives in both public and private sectors is lack of delegation.

By delegating tasks and decisions, the government can concentrate on more high-value tasks to accomplish the set goals.

Provide incentives for workers

Failure in the government sector can happen due to the low performance of the party involved. One way to remedy this is to introduce profit incentives in the public sector.

Sources

1. Concorde: The Real Reason Why the Supersonic Passenger Jet Failed, Interesting Engineering, 2017.