Market Failure & Government Intervention

Government failure occurs when the costs of intervention exceed the benefits of correcting the original market failure.. Government failure means the costs of intervention, such as distortions, unintended consequences and administrative burden, exceed the benefit of correcting the original problem.

The external cost of pollution means the marginal social cost lies above the marginal private cost the firm considers. As a result the market over-produces relative to the social optimum, generating a deadweight welfare loss equal to the area where social cost exceeds social benefit.

The external cost of pollution means the marginal social cost lies above the marginal private cost the firm considers. A diagram for this topic isn't available yet — the worked example below walks the same reasoning step by step.

• !Some students may think that the tax is designed to eliminate the good from the market entirely or to raise output to the free-market level, but this is not the case. The tax is actually designed to correct the market failure by internalising the externality.
• !Many students confuse government failure with market failure, but they are distinct concepts. Government failure refers specifically to the negative consequences of government intervention, whereas market failure refers to the inefficiencies that arise from the market itself.

Answer each from memory — you'll see instantly whether you're right and why.

Run a focused 10-question mini-mock on Market Failure & Government Intervention and see it stick.