Government failure

In the analysis of regulation, government failure (or non-market failure) is imperfection in government performance. The phrase "government failure" emerged as a term of art in the early 1960s with the rise of intellectual and political criticism of regulation. Building on the premise that the only legitimate rationale for government regulation was market failure, economists advanced new theories explaining why government interventions in markets were costly and tend to fail. For example, it was argued that government failure occurs when government intervention causes a more inefficient allocation of goods and resources than would occur without that intervention. In not comparing realized inadequacies of market outcomes against those of potential interventions, one writer describes the "anatomy" of market failure as providing "only limited help in prescribing therapies for government success". Government failures, however, occur also whenever the government performs inadequately, including when it fails to intervene or does not sufficiently intervene. Some use the phrase "passive government failure" to describe the government's failure to intervene in a market failure that would result in a socially preferable mix of output. Just as with market failures, there are different kinds of government failures that describe corresponding economic distortions.

An early use of "government failure" was by Ronald Coase (1964) in comparing an actual and ideal system of industrial regulation:

Roland McKean used the term in 1965 to suggest limitations on an invisible-hand notion of government behavior. More formal and general analysis followed in such areas as development economics,ecological economics,political science,political economy,public choice theory, and transaction-cost economics.

The idea of government failure is associated with the policy argument that, even if particular markets may not meet the standard conditions of perfect competition required to ensure social optimality, government intervention may make matters worse rather than better.

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