More on Government Failure
See my previous post. This is Gary Becker, writing at his blog:
When an industry in the private sector is not performing efficiently or effectively, there is said to be “market failure”. The recommendation by economists and others typically is then for government actions to combat such failure, such as taxes to help reduce pollution. The diagnosis of market failure may be accurate, but the call for government involvement may be naïve and inappropriate.
The reason is that actual governments do not necessarily do what economists and others want them to do because there is “government failure” as well as market failure. Before recommending government actions to correct market failures, one should consider whether actual government policies would worsen rather than improve private sector outcomes. Since many factors often make for considerable government failure, considering such failure is crucial and not just a theoretical fine point.
Becker makes a lot of sense.
Good post.
Good insight.
Of course, first be sure that government interference is not the real cause of the “market” failure in the first place.
Additionally, much of what is called “failure” is due to the fact that the sum of individual market choices doesn’t match what some select group defines as “efficient” or “effective”.
We need to be careful about accepting the opposition’s definition of the problem.
I remember my undergraduate course in public economics. The professor (who was very good, but teaching from a script) told us that market failure occurred when the sum of individuals’ private utility (or, perhaps, welfare) functions differed from the social utility function. He actually drew curves on an XY two-dimensional plane to illustrate the difference!
We learned nothing about public-choice theory. It wasn’t until studying quietly in my room that I realized how ridiculous it was to think that politicians spend their time estimating the difference between the social utility function and the sum of private utility functions and designing taxes, government spending, and regulation to minimize the difference.
Not until I read Professor Arrow’s impossibility theorem did I realize that not all economists lived in a dreamworld where the government is all-knowing, all-benevolent, and all-powerful.
In these times, we hear a lot about market failures, and not enough about government failures.
I a lot of instances, market failure isn’t market failure at all but the failure of the market to act like government wants it to act.
“Before recommending government actions to correct market failures, one should consider whether actual government policies would worsen rather than improve private sector outcomes. Since many factors often make for considerable government failure, considering such failure is crucial and not just a theoretical fine point.”
Interesting, though Becker’s post (or at least the excerpt here) does not necessarily imply that government failure will always outweigh market failure as many libertarians seem to believe. The reverse of Becker’s statement is also a legitimate point: Before recommending privatization to correct government failures, one should consider whether privatization policies would worsen rather than improve outcomes.