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Government response to market failure

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Why may a government's solution to a market failure worsen the market failure? Can you think of any examples that apply to this?

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Solution Summary

How governmental interference and worse a market failure is discussed in this solution.

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The "invisible hand" is the basis of our conception of free markets. It fails for only a few specific reasons: They include: (1) goods that are characterized by nonrival consumption and/or problems excluding nonpayers from consumption, (2) limited competition and market control by either buyers or sellers, (3) external costs or benefits that are not reflected in demand price or supply price, or (4) limited or imperfect information about the product or market transaction by either buyer sellers. Market failures can be problematic, but government solutions are sometimes worse.

Governments rely on bureaucracy and have weak incentives ...

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