Government failure, on the other hand, occurs when government intervention in the market reduces economic and social welfare. One example of how government failure can manifest is with the law of unintended consequences, the idea that actions taken with good intentions can have unanticipated and negative consequences. Another example of government failure is rent seeking, where individuals or firms use political influence to obtain economic benefits at the expense of others. Rent seeking results in an inefficient allocation of resources, since resources are allocated on the basis of political power rather than economic efficiency. For example, a company may lobby the government to reduce competition in a particular industry, which would allow it to charge higher prices and earn greater profits at the expense of consumers.
This lesson will examine how both market failure and government failure can result in an inefficient allocation of resources and a loss of economic and social welfare. Students will also learn why It is important for policymakers to consider both of these types of potential failure when designing policies to address economic problems, and to be aware of the potential unintended consequences of their actions.