Editing Government failure (section)

== Examples ==

=== Economic crowding out === 
Crowding out is when the government over corrects the market failure leading to the displacement of the private sector investment. This involves an excess amount of spending in the public sector, excess increase in interest rates or excess increase in taxes all of which will decrease the public sectors borrowing demand from banks. This whole situation forces inefficiencies in the private sector and therefore shrinks, causing a market failure from a government failure.<ref name=":24">{{Cite journal |last=Kenton |first=Will |title=What Is the Crowding Our Effect Economic Theory |journal=Government Spending and Debt}}</ref>

=== Regulatory ===
[[Regulatory arbitrage#Regulatory arbitrage|Regulatory arbitrage]] is a regulated institution's taking advantage of the difference between its real (or economic) risk and the regulatory position.<ref>• [[Stephen Breyer]] (1979). "Analyzing Regulatory Failure: Mismatches, Less Restrictive Alternatives, and Reform," ''Harvard Law Review'', 92(3), pp. [http://www.uiowa.edu/~c030137/breyer.pdf 547–609]{{dead link|date=December 2017 |bot=InternetArchiveBot |fix-attempted=yes }}.<br>&nbsp;&nbsp;&nbsp;• [[Joseph E. Stiglitz]] (2009). "Regulation and Failure," in David Moss and John Cisternino (eds.), ''New Perspectives on Regulation'', ch. 1, pp. [http://tobinproject.org/sites/tobinproject.org/files/assets/New_Perspectives_Ch1_Stiglitz.pdf 11–23.] Cambridge: The Tobin Project.</ref>

[[Regulatory capture]] is the co-opting of regulatory agencies by members of or the entire regulated industry. [[Rent seeking]] and [[rational ignorance]] are two of the mechanisms which allow this to happen. [[Rent seeking]] and [[rational ignorance]] are two of the mechanisms which allow this to happen. Rent extraction positively correlates with government size even in stable democracies with high income, robust rule of law mechanisms, transparency, and media freedom.<ref>{{cite journal|first1=Alexander J.|last1=Hamilton|date=2013|url=http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2013/01/07/000158349_20130107132037/Rendered/PDF/wps6305.pdf|title=Small is Beautiful, at Least in High-Income Democracies: The Distribution of Policy-Making Responsibility, Electoral Accountability, and Incentives for Rent Extraction|publisher=The World Bank Institute|id=Policy Research Working Paper 6305|quote=This paper hopes to contribute towards an explanation of these empirical regularities by developing and testing a new contextually enriched career concerns model of the political economy of public policy-making.}}</ref>

Regulatory risk is the risk faced by private-sector firms that regulatory changes will hurt their business.<ref>{{cite web|url=http://www.economist.com/research/Economics/alphabetic.cfm?LETTER=R#REGULATORY%20RISK |title=Regulatory risk |publisher=Economist.com |access-date=2013-10-21}}</ref>

=== Distortion of markets ===
Taxation can lead to [[market distortion]]. They can artificially change prices thus distorting markets and disturb the way markets allocate scarce resources. Also, taxes can give people incentive to evade them, which is illegal. Minimum price can also result in markets’ distortion (i.e. alcohol, tobacco). Consumer would spend more on harmful goods, therefore less of their income will be spent on beneficial goods. Subsidies can also lead to misuse of scarce resources as they can help inefficient enterprises by protecting them from free market forces.

[[Price floor]]s and [[price ceiling]]s can also lead to social inefficiencies or other negative consequences. If price floors, such as [[minimum wage]], are set above the market equilibrium price, they lead to shortage in supply, in case of minimum wage to a higher [[unemployment]]. Similarly the price ceilings, if set under the market equilibrium price, lead to shortage in supply. [[Rent ceiling]], for example may then lead to shortage in accommodation.<ref name=":3" /> Other problems often arise as consequences of these interventions. [[Black market]] of labor and higher unemployment among uneducated and poor are possible consequences of minimum wage while deterioration of residential buildings might be caused by rent ceiling and subsequent lack of incentive for landlords to provide the best services possible.

=== State monopolies ===
Most [[State monopoly|government providers operate as monopolies]] (e.g. post offices). Their status is sometimes guaranteed by the government, protecting them from potential competition. Furthermore, as opposed to private monopolies, the threat of bankruptcy is eliminated, as these companies are backed by government money. The companies are thus not facing many efficiency pressures which would push them towards cost minimisation - causing a social inefficiency.<ref name=":3" />

There are still some existing efficiency pressures on state monopoly managers. They mostly come from the possibility of their political masters being voted out of office. These pressures are however unlikely to be as effective as market pressures, the reasons being that the elections are held quite infrequently and even their results are often fairly independent on the efficiency of state monopolies.<ref name=":3" />

=== Corruption ===
[[Corruption]] is the illegitimate use of public power to benefit a private interest.<ref>Morris, S.D. (1991), Corruption and Politics in Contemporary Mexico. University of Alabama Press, Tuscaloosa</ref> This erodes [[public trust]].