Editing Government failure (section)

{{Short description|Concept of public economics}}
{{about|a term used in the field of [[public economics]]|the term describing a failed government|Failed state}}
{{distinguish|Government shutdown}}
In [[public choice]], a '''government failure''' is a counterpart to a [[market failure]] in which government regulatory action creates [[economic inefficiency]].<ref>Orbach, Barak (2013). "What Is Government Failure," ''Yale Journal on Regulation Online'', 30, pp. [http://ssrn.com/abstract=2219709 44–56.]</ref> A government failure occurs if the costs of an intervention outweigh its benefits. Government failure often arises from an attempt to solve market failure. 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.

As with a market failure, government failure is not a failure to bring a particular or favored solution into existence but is rather a problem that prevents an efficient outcome. The problem to be solved does not need to be market failure; governments may act to create inefficiencies even when an efficient market solution is possible.

Government failure (by definition) does not occur when government action creates winners and losers, making some people better-off and others worse-off than they would be without governmental regulation. It occurs only when governmental action creates an inefficient outcome, where efficiency would otherwise exist. A defining feature of government failure is where it would be possible for everyone to be better off ([[Pareto improvement]]) under a different regulatory environment.

Examples of government failure include [[regulatory capture]] and [[Regulatory arbitrage#Regulatory arbitrage|regulatory arbitrage]]. Government failure may arise because of unanticipated consequences of a government intervention, or because an inefficient outcome is more politically feasible than a [[Pareto_efficiency|Pareto improvement]] to it. Government failure can be on both the [[demand]] side and the [[supply (economics)|supply]] side. Demand-side failures include preference-revelation problems and the illogic of voting and [[collective behaviour]]. Supply-side failures largely result from [[principal–agent problem]].<ref>Connolly, S. & Munro, A. (1999). 'Public Choice', Chapter 8 in ''Economics of the Public Sector'', Pearson, Harlow, Essex.</ref> Government failure may arise in any of three ways the government can involve in an area of social and economic activity: provision, taxation or subsidy and regulation.<ref name=":3" />