Government Failure

Government failure (or non-market failure) is the public sector analogy to market failure and occurs when a government intervention causes a more inefficient allocation of goods and resources than would occur without that intervention. Likewise, the government's failure to intervene in a market failure that would result in a socially preferable mix of output is referred to as passive Government failure (Weimer and Vining, 2004). Just as with market failures, there are many different kinds of government failures that describe corresponding distortions.

The term, coined by Roland McKean in 1965, became popular with the rise of public choice theory in the 1970s. 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.

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; sometimes, some voters may prefer a governmental solution even when a market solution is possible.

Government failure can be on both the demand side and the supply side. Demand-side failures include preference-revelation problems and the illogics of voting and collective behaviour. Supply-side failures largely result from principal–agent problem.