Market Failure: An Argument Both for and Against Government

Discussions of market failures are often missing the corresponding discussion of government failures. In our cost calculus, we should consider the welfare loss of government failures incurred by intervention relative to that of market failures due to non-intervention.

Consider the case of overconsumption of a good with small negative externalities by a small subset of the population. Given the opportunity, the tyranny of the majority will overcorrect and ban consumption of that good. Given a social welfare function of your choice, this may lower total welfare relative to the unregulated outcome.

Additionally, poorly conceived interventions in the pricing structures of many natural monopolies have actually pushed prices upwards for consumers.

This isn't to say that all intervention is ineffective. The EPA's Acid Rain Program has done wo0nders to internalize externalities.

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