Government failure is the public sector analogy to market failure and occurs when a government does not efficiently allocate goods and/or resources to government consumers. Such consumers are typically citizens, but may be non-citizens in certain contexts. Just as with market failures, there are many different kinds of government failures. However, while market failure has been widely studied, government failure has only recently come into common usage as the lenses of Public choice theory and New Institutional Economics (NIE) or Transaction Cost Economics (TCE) have begun to explore the problems. Just as a market failure is not a failure to bring a particular or favored solution into existence at desired prices, but is rather a problem which prevents the market from operating efficiently, a government failure is not a failure of the government to bring about a particular solution, but is rather a systemic problem which prevents an efficient government solution to a problem. The problem to be solved need not be a market failure; many solutions potentially solvable by government means are preferred to viable market solutions by subsets of voters. Market failure is a situation in which markets do not efficiently organize production or allocate goods and services to consumers. ... Public choice theory is a branch of economics that studies the decision-making behavior of voters, politicians and government officials from the perspective of economic theory, namely game theory and decision theory. ... New institutional economics (NIE) may be characterized as a new perspective in economics. ...

Problems at the legislative level

• Crowding out - Crowding out occurs when the government expands its borrowing more to finance increased expenditure or tax cuts in excess of revenue crowding out private sector investment by way of higher interest rates.
• Logrolling - The process by which legislators trade votes
• Pork barrel spending - The tendency by legislators to encourage government spending in their own constituencies, whether or not it is efficient or even useful. Senior legislators, with greater status and ability to "bring home the bacon", may be reelected for this reason, even if their policy views are at odds with their constituency.
• Rational ignorance - because there are monetary and time costs associated with gathering information, and the benefits to doing so is limited, voters will not necessarily obtain all of the information necessary to make an informed decision on a subject on which they may nonetheless cast a vote. This is as true for legislators as for private citizens.
• Rent seeking - The tendency by interest groups to lobby for laws and regulations that provide them a guaranteed benefit (rent). There are three main classes of rent-seekers: legislators, administrators, and regulated entities. Legislators will try to change laws to ensure their continued incumbency, such as gerrymandering. Administrators (bureaucrats) may seek to advance their power and budget authority. Regulated entities may seek to obtain barriers to entry or other special provisions of the law that reduce competition, increase subsidization, or both.
• Short time horizons - The tendency to fixate on short term fixes and to ignore large, complex problems. This may be driven to the election cycle. See, for example, "Political cycles in nontraditional settings: theory and evidence from the case of Mexico", Grier and Grier, JLE vol. XLIII (April 2000), p. 239.

In economics, crowding out theoretically occurs when the government expands its borrowing to finance increased expenditure, or cuts taxes (i. ... Logrolling is a colorful phrase used to describe trading of votes by legislative members to obtain passage of actions of interest to each legislative member. ... Pork barrel (or pork barrel politics) is a derogatory term used to describe United States government spending that is intended to enrich constituents of a politician in return for their political support, either in the form of campaign contributions or votes. ... Rational ignorance is a term most often found in economics, particularly public choice theory, but also used in other disciplines which study rationality and choice, including philosophy (epistemology) and game theory. ... The phenomenon of rent-seeking was first identified in connection with monopolies by Gordon Tullock, in a paper in 1967. ... Gerrymandering is a controversial form of redistricting in which electoral district or constituency boundaries are manipulated for an electoral advantage. ... In economics and especially in the theory of competition, barriers to entry are obstacles in the path of a firm which wants to enter a given market. ...

Problems at the regulatory level

• Regulatory arbitrage - Regulatory arbitrage is where a regulated institution takes advantage of the difference between its real (or economic) risk and the regulatory position.
• Regulatory capture - 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.
• Regulatory failure - When regulation generates more economic costs than benefits.
• Regulatory risk - A risk faced by private-sector firms that regulatory changes will hurt their business.
• Rent seeking - see above.

In economics, arbitrage is the practice of taking advantage of a price differential between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices. ... Regulatory capture is an economic phenomenon in which a government regulatory agency becomes dominated by the interests of the industry that it oversees. ...

Generalized problems of information assessment

• Environmental impact - Public support for roads lowers the cost of operating a vehicle; farm subsidies and programs like the Soil Conservation program encourage farmers to use fields which require more intense application of fertilizer and irrigation. Both of these have an adverse impact on the environment.
• Imperfect information - Especially in Pigouvian application, gathering sufficient information is no easier for the regulatory agency than for individual actors
• Market distortion
  • By tax structures - by organizing taxation in a particular way, investments may be directed so as to avoid those taxes even though the investments are inferior
  • By regulatory ordering - mandating a particular solution may prohibit all other solutions, some of which may be superior
  • By subsidization - by subsidizing particular goods, these may force other, nonsubsidized, but superior substitutes from the market
  • Risk assumption - by promising to relieve risk-takers, the government encourages risk-taking whose benefits accrue to a minority while spreading the assumption of that risk across the populace. The Savings and Loan crisis of the 1980s is one example; federal assumption of responsibility for the Mississippi River levee system, disaster relief, and Effect of Hurricane Katrina on New Orleans is another.
• Unintended consequence - An unintended consequence comes about when a mechanism that has been installed with the intention of producing one result is used to produce a different (and often conflicting) result. (e.g. rent control leads to shortages in housing)

Perfect information is a term used in economics and game theory to describe a state of complete knowledge about the actions of other players that is instantaneously updated as new information arises. ... A Pigouvian Tax is a tax on external activities. These activities, called externalities, are actions not taken into account by the acting party. ... A market distortion is a specific type of market failure brought about by deliberate government regulation which prevents economic agents from freely establishing a clearing price. ... The Savings and Loan crisis of the 1980s was a wave of savings and loan association failures in the United States in which over 1,000 savings and loan institutions failed. ... The Mississippi River, derived from the old Ojibwe word misi-ziibi meaning great river (gichi-ziibi big river at its headwaters), is the second-longest river in the United States; the longest is the Missouri River, which flows into the Mississippi. ... It has been suggested that this article or section be merged with Dike (construction). ... {{Katrina) nathan cuff got on my compute ... This article or section does not cite its references or sources. ... Rent control refers to laws or ordinances that set price controls on residential housing. ...

See also

• iron triangle
• regulatory capture

This article or section does not cite its references or sources. ... Regulatory capture is an economic phenomenon in which a government regulatory agency becomes dominated by the interests of the industry that it oversees. ...

References

• Grier, Robin M. and Grier, Kevin B., "Political cycles in nontraditional settings: theory and evidence from the case of Mexico", JLE vol. XLIII (April 2000), p. 239
• Kolko, Gabriel (1977), The Triumph of Conservatism, The Free Press, ISBN 0-02-916650-0
• Kolko, Gabriel (1977), Railroads and Regulation, 1877-1916, Greenwood Publishing Company, ISBN 0-8371-8885-7
• Niskanen, William (1967), The peculiar economics of bureaucracy, Institute for Defense Analyses, Program Analysis Division (1967), ASIN B0007H5TBG
• Niskanen, William (1971), Bureaucracy and Representative Government, Aldine, Atherton, ISBN 0-202-06040-3

External links

• John Stossel's article about inefficient distortions created by FEMA, written before Katrina