Groundwater pollution and its associated social costs were traditionally considered as the outcome of “market failure”. However, in recent years it has been argued that pollution-related issues can be attributed to the failure of government as well. The literature on ‘externality’ has identified different sources of government failure. In this paper, we have identified certain specific sources of government failure that are potentially affecting the groundwater quality in the state of Tamil Nadu, India. The major sources that we have identified are: the inappropriate approach used by the government agencies to assess the quantity and quality of water resources potential in the state; the inability of the government sector to account for the resulting environmental damage and the lack of coordination between different agencies/institutions involved in managing the water resources in the state. Some remedial measures are also suggested.

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