Definition
- Government failure
- Government failure is government intervention that itself results in an inefficient allocation of resources, such as a subsidy for a polluting good or regulation that causes shortages.
- Not to be confused with: Market failure
- Market failure is a situation where the free market, left to its own devices, is unable to achieve optimal economic efficiency.
Test yourself
What is the difference between government failure and market failure?
Market failure is the market misallocating resources; government failure is an intervention that itself misallocates them.