Government Failure

Government Failure

Society, Markets and Rules

Wilfred Dolfsma

This highly unique book takes a fundamental look at when and how a government can fail at its core responsibility of formulating rules. Government, representing society, relates to the economy by formulating the rules within which (market) players should operate. Although market and business failure are much discussed in the economics literature, government failure is often overlooked. This book addresses this gap, exploring in detail what constitutes government failure.

Chapter 5: Government failure

Wilfred Dolfsma

Subjects: economics and finance, institutional economics, law and economics, political economy, public choice theory, welfare economics, law - academic, law and economics, politics and public policy, political economy, public choice, social policy and sociology, economics of social policy


The way in which economists have looked at the state and its effects on the economy has fluctuated substantially over time (Medema 2003). In contrast to what the first substantial article in the first constitution of the American Economic Association holds, governments are now largely seen as affecting the workings of an economy negatively if and when they do more than what a ‘night-watch state’ would. Nowadays, economists tend to see the market as a default option for social order and a role for government only when markets fail. Markets are typically believed to fail under circumstances of (excessive) externalities that are either positive or negative, in cases when public goods are traded, in cases of increasing returns or a natural monopoly creating market imperfections, or, possibly, according to some, to correct unequal distribution of wealth or income. Some economists, such as social and institutional economists, have been more amenable to a role for government in the economy. Its role, when explicitly investigated, is sometimes seen as benevolent in principle. In addition, institutional economics recognizes that markets cannot function if not embedded in a broader set of interrelated institutions.

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