Government Failure

In welfare economics, a market failure is not simply a market outcome that someone does not like. Rather, it is when the competitive price system fails to allocate resources efficiently, where this usually refers to a violation of Pareto optimality. One example might be the provision of goods that are systematically underpriced in a competitive market because not all the costs associated with private transactions are internalized. Other market failures include the underprovision of certain goods in a competitive market because of the lack of adequate monetary incentive or because of collusive agreements among market providers to restrict supplies in order to extract economic rents. Similarly, a government failure is not simply a government outcome that someone does not like. Rather, it occurs when government ...