Government failure is when the government steps in and causes inefficiencies in the public sector due to poor allocation of goods and such like and there are different types of government failure. The intervention actually causes more damage and the market may have been able to perform better without the government stepping in. These types of failure could exist on the demand and the supply end but either way these are controlled by the government due to which it is said that the market is suffering from one of the many types of government failure.
Crowding out is one of the many types of government failure. What happens is that the government tends to borrow more money than it can spend and the reason for this borrowing may be lack of resources and funds. As a result of this private investments reduce because of the fact that the government is taking way more than it can pay back. Less money is spent on investment, there is more focus on borrowing and the funds that are borrowed affects the fiscal policy. Because of this the government has to increase taxes and interest rates and the costs are passed on to the market and that is why government failure (also known as market failure) of this sort takes place.
Another of the many types of government failure occurs due to increased taxes and higher interest rates. When the prices of goods that are supplied to the market are increased that means that the demand is higher than the supply. This is due to the intervention of the government because the fiscal policy, interest rates and such factors are affected by the government’s expenditure. As a result the market suffers as it has to pay more for the same goods that were relatively cheaper. A classic example is that of Pakistan where the prices of goods that once cost PKR 55 now cost PKR 90 due to poor management of the government.
Then, there are those types of government failure that occur due to lack of knowledge and experience and these types of government failure are known as information failure- the government has no knowledge as to how to allocate resources and its allocation policies. Poor allocation and distribution of resources causes failure in this case when the government steps in and it may be better to let the private market and investors manage everything.
What basically happens in all types of government failure is that the government steps in to rectify the economic situation. The market may or may not be running fine in the hands of the private investors and firms. When the government steps in and the matters go from bad to worse, that is when one of the many types of government failure takes place. This can have long-term effects and that is obvious in the increase of prices of goods and products, high rates of unemployment, increased interest rates and more borrowing of funds by the government too.