Market Failure
Reduced government spending (G) to decrease inflationary pressure could adversely effect public services such as public transport and education causing market failure and social inefficiency.
Government Failure
There are objective limitations if government choose to cut spending or/and increase tax rate. This may lead to government failure.
- The government may have poor information about the state of the economy and struggle to have the best information about what the economy needs.
- Time lags. To increase government spending will take time. It could take several months for a government decision to filter through into the economy and actually affect AD. By then it may be too late.