Title: Government failure | Economics Online | Economics Online
Headings: 
Government failure
Examples of government failure include:
Distortion of the price mechanism
Costs of administration
Imperfect knowledge
Law of unintended consequences
Business Economics
Explaining The K-Shaped Economic Recovery from Covid-19
Does Public Choice Theory Affect Economic Output?
Largest Retail Bankruptcies Caused By 2020 Pandemic
Identifying Speculative Bubbles and Its Effect on Markets
Explaining The Disconnect Between The Economy and The Stock Market
Consumer Confidence Compared to Q2 Job Growth
Global Affairs
Alternatives to GDP in Measuring Countries
Multiplier Effect

Content: Direct taxation can create a disincentive effect for households and firms. We have seen that taxes on harmful demerit goods, where demand is inelastic, may simply mean that more income is allocated to expenditure on harmful goods, and hence less income is available for spending on beneficial goods. The same is possible with the imposition of a minimum price, such as the one on alcohol, where spending is distorted with the consumer allocating more income to alcohol rather than less. Subsidies can be criticised as they can encourage the wasteful misuse or over-use of scarce resources. For example, free healthcare can result in doctors’ waiting rooms becoming become full with the malingerers and the so-called ‘worried well’. This can result in a waste of public resources and a denial of access to these services by those in genuine need. Subsidies may also protect inefficient firms from open competition as well as creating artificial barriers to entry for new firms – given that prices are kept ‘artificially’ low. Subsidies, and other assistance, can lead to the wider problem of moral hazard. Taxation can also distort behaviour by encouraging people to either avoid taxes (which is the attempt to find legal loopholes in the tax system) or evade taxes (which is illegal) through criminal activity such as smuggling and the use of black markets. Governments can also fix prices, such as minimum and maximum prices, but this can create distortions which can lead to: