government failure essay

Examples of how government intervention can cause government failure

Explanation of why government intervention to try and correct market failure may result in government failure.

Market failure is a socially inefficient allocation of resources in a free market. Market failure can occur for various reasons

Externalities
Demerit/merit goods
Public goods
Monopoly power

Government failure occurs when government intervention results in a more inefficient and wasteful allocation of resources. Government failure can occur due to:

Poor incentives in public sector
Lack of information
Bureaucracy and administration costs higher in public sector
Decisions taken for political reasons

Example of government intervention in transport

Transport is prone to market failure as it is a good with significant externalities. For example, driving a car into a city causes congestion and pollution – two negative externalities. Therefore, we get a social inefficient allocation of resources – congestion and time wasted by business and commuters.

The free market output is at Q1, but social efficiency is at Q2.

To respond to this problem, the government may try to intervene in the economy. For example, it could raise taxes and build a new highway, which travels into the city. In theory, this should reduce congestion and help solve the market failure. However, in building a new inter-city highway, there may be government failure.

Unintended consequences . As a result of building the new highway, it may encourage more people to buy a car and live further out of the city. In this case, increasing supply has an effect on increasing demand in the long-term. After 5 or 10 years, the levels of congestion can end up being as bad as before the government spent all the money in building the new road. But, in addition to the failure to solve congestion, the government have increased levels of pollution and wasted public funds on a scheme that has failed to tackle the problem.

The government may undertake such a scheme due to poor planning. A new highway may be a popular political idea in the short-term by residents keen to beat traffic jams. However, the politicians fail to explain the potential drawbacks of more congestion in the long-term.

Example of Subsidy for loss-making firm

The government may be worried that if a large steel plant closes down, it will result in unemployment. This unemployment will be a type of market failure as the unemployed steelworkers may struggle to gain employment in new areas. As a result, the government uses public funds to give a subsidy to the steel plant and keep the firm in business.

However, government subsidies to failing business can lead to government failure.

If firms become used to receiving a government subsidy, they may feel fewer incentives to cut costs and transform the business – they become reliant on subsidies and the government ends up wasting public funds on supporting inefficient firms. In the long-run, consumers end up paying higher taxes and higher prices for steel

Example of Market failure in agriculture – CAP

Minimum price caused supply to be greater than demand. The EU had to buy the surplus Q3-Q1

Governments often intervene in agricultural markets. The argument is that agriculture is prone to market failure. Supply can be volatile and in certain years farmers are left with lower incomes. Therefore, to stabilise food supply and farm incomes, the government have intervened. The EEC implemented a Common Agricultural Policy (CAP) which involved guaranteeing a minimum price for agricultural produce.

However, this also required import tariffs to keep the minimum prices protected from international competition.

The problem with this policy is that it had unintended consequences. As farmers had a guaranteed minimum price, it created an incentive for them to produce as much as possible. It was guaranteed the government would buy any surplus.

Farmers started using more artificial fertilisers to maximise yields.
The EU had to keep buying more an more surplus food, which was stored in big depositories (known as wine lakes, butter mountains)
The food was either destroyed or dumped on world markets (causing lower income for farmers in developing economies)

Therefore, in order to overcome the market failure of volatile prices for farmers, the EU created a system where:

The price of food was higher than it should have been.
Tax revenue was used to buy surplus food that was not needed.
The environment was damaged by farmers trying to maximise yields.
The EU experienced retaliatory tariffs from other countries in response to high agricultural tariffs on food.
At its peak the CAP took 70% of the EU budget – money that could have been better spent elsewhere.

Example Monopoly

Monopoly leads to market failure because firms are in a position to increase prices at the expense of the consumer and be more inefficient. To prevent an increase in Monopoly power, the Competition Commission can block mergers; however, some mergers could have benefits e.g. economies of scale and more research and development. If the government blocked all mergers this may be harmful to the economy

Understanding Government Failure

Peter h. schuck.

To create better solutions to today’s problems, policymakers must analyze government’s successes and failures.

Public discontent over many of the federal government’s domestic policy efforts has reached alarming proportions. In my recent book, Why Government Fails So Often: And How It Can Do Better , I entertain a number of possible causal explanations, but I focus on the most straightforward one: across many different policy domains, the public perceives poor governmental performance – and generally speaking, the public is correct in this view.

This explanation is buttressed by social scientists who have reviewed and assessed federal domestic programs in great detail, producing many data points that in a large number of cases indicate government failure, defined as cost-ineffectiveness. This failure is evident even though the government allocates a vanishingly small percentage of its budget to assessing how effective the vast majority of its spending is in achieving its putative purposes. These failures, I argue, are structural and recurrent in nature, and each chapter in my book analyzes in depth a different set of structural causes, which I outline here.

But let me first very briefly explain what impelled me to write this book and the challenges that I encountered when I did so. I have long been intrigued by the central questions surrounding federal domestic regulation, some of which include:

What conditions justify regulation in the first place?
How do the specific features of particular markets affect the regulation that seeks to re-shape them?
Which of the many regulatory forms, techniques, and procedures should be employed under what circumstances?
Which political economy and other factors determine regulation’s consequences?
How should regulatory effectiveness be assessed?

But regulation is only one policy instrument among many, and Why Government Fails So Often is concerned with policies’ failure and success regardless of the forms that those policies take. The research literature that I found contains many excellent studies of one or another policy, but very few look across the numerous discrete policy areas to identify the recurrent, systemic, structural determinants and patterns of federal policy performance. Even fewer bring the discipline of peer-reviewed and other authoritative social science data to bear on the vital question of governmental performance.

My book attempts to fill this gap. Why Government Fails So Often begins with a chapter introducing some important themes: the striking success of American society along many (but not all) dimensions; the growing public dissatisfaction with the federal government and possible reasons for this trend; the challenge of defining policy failure and success; the high social stakes in improving government performance; an introductory thumbnail sketch of the social science evidence demonstrating widespread failure; the difference between optimists and realists about government performance; and a preface to markets that cast such long shadows across all policymaking that seeks to control them.

Chapter 2 defines success, failure, and in-between assessments and defends a criterion of cost-effectiveness, rightly understood and suitably qualified. Chapter 3 describes the functions, processes, missions, instruments, and institutions of policymaking, and Chapter 4 analyzes the main elements of the political culture that shape and constrain it: constitutionalism; decentralization; protection of individual rights; interest group pluralism; acceptance of social and economic inequality; religious and political moralism; social diversity; populist suspicion of technical expertise and official discretion; public opinion; and civil society.

The next six chapters constitute the heart of my causal analysis of government performance and of the social science evidence on which this analysis is based. These chapters focus on incentives and collective irrationality (Chapter 5); information, inflexibility, incredibility, and mismanagement (Chapter 6); markets (Chapter 7); implementation (Chapter 8); the inherent limits of law, the almost universal policy tool (Chapter 9); and the federal bureaucracy (Chapter 10). Chapter 11 considers a dozen policy success stories, attempting to distill why they worked. Chapter 12 presents my proposed remedies, which are limited to those that can cut across all policy domains and which are sub-constitutional and relatively incremental in nature. Chapter 13 presents a summary conclusion and exhortation that we come to accept the brutal “facts of public life” and think more realistically about what government can accomplish.

Participants in the The Regulatory Review series discussing my book this week, as well as readers of the book, will of course address whichever issues they find most interesting. But in the interest of provoking the discussion, here are some issues that I posed previously at a Notre Dame conference organized around the book. I have classified them as descriptive, normative, prescriptive, and political questions.

Descriptive : How accurate is the book descriptively? How representative are its examples, and how accurate are the data on which it relies? How applicable are its analysis and findings to state and local governments?

Normative : In the analysis of performance, does the analysis neglect relevant values other than cost-effectiveness, and if so which ones? Is my approach too technocratic?

Prescriptive : Are my proposed remedies politically feasible? Are they equal to the nature and magnitude of the policy problems to which they are addressed? Are they too incremental? Is the bureaucracy on which reforms depend equal to the challenge of implementing them?

Political : Are the constitutional and cultural impediments to more effective government discussed in Chapter 4 too great? Is the public so disgusted and apathetic to be aroused to support targeted reforms (as distinct from its unfocused indignation)? Is the book (as one reviewer put it) “a gateway drug to libertarianism”? Are my moderate proposals doomed to failure in an increasingly polarized polity? Will those on the left likely to take my critique seriously?

These are vital questions both for public leaders and members of the public, and we need more analysis of them. I am therefore most grateful to Professor Cary Coglianese for organizing this The Regulatory Review series and to the several other participants in the recent Notre Dame conference on the book whom Coglianese has urged to participate in this online discussion. Only by understanding better the reasons for government failure can policymakers have any chance of making it succeed, at least in those ever-decreasing times when the conditions are right for its success.

This essay is part of The Regulatory Review’s seven-part series, Is Government Prone to Fail?

Peter H. Schuck is the Simeon E. Baldwin Professor Emeritus of Law at Yale Law School and the author of Why Government Fails So Often: And How It Can Do Better (Princeton University Press), among many other books. His current project is a book tentatively entitled Five Hard Issues and How to Think About Them (Princeton University Press), analyzing the issues of immigration, affirmative action, poverty, campaign finance, and religious accommodation.