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What Are the Similarities between Market Failure and Government Failure?
A market failure and government failure are both about inefficiency. In the financial markets, an inefficiency is recognized when there is not someone else experiencing the other side of a trade. For instance, when someone benefits or profits from a financial transaction, someone else should lose, otherwise the market has failed. A government fails when it too creates inefficiencies, typically by intervening in the markets in a futile attempt to make markets more efficient. When a government steps in financially to rescue a corporation, it might be expected to similarly intervene when other similar businesses are under duress.
In the economy, there are some institutions and industries that are considered just too large and too important to the capital markets and the jobs market to fail. When it appears that a large institution or an entire industry is going under, the government might step in to prevent a colossal failure. The government can do this by extending a bailout or stimulus package that will keep the corporation or industry afloat.
It is possible that the money used in a market bailout is taxpayer money. Also, a bailout that a government extends may be a loan that must be repaid over a predetermined period of years. A market failure and government failure could arise if the lifeboat that is offered does not accomplish what it was designed to do.
If a government uses federal money to rescue the markets and the bailout proves unsuccessful, for instance, if the funding was meant to prevent large corporations from declaring bankruptcy and those companies become insolvent anyway, there has been a market failure and a government failure. It is possible that a government responds too quickly to a precarious market situation. If the government intervenes prematurely rather than letting the markets stabilize, the result could once again be a market failure and government failure.
Economists argue that a government failure has more dire results than a market failure. Given that taxpayer money is often used to finance a market rescue, if citizens do not condone a decision to bail out a corporation or an industry, support for a regional government may wane. It may be especially difficult for the public to support a rescue if the executives within a failing corporation have been earning excessive salaries and bonuses. When politicians decide to intervene in the markets, the reasons should be clearly justified and reasonable to prevent a market failure and a government failure.
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Discussion Comments
@turkay1, @simrin-- I wouldn't quite put it that way. @Simrin is right but I think that description is too generalized.
The similarity between market failure and government failure is that both are an inefficient allocation of resources. The difference between the two is the exact causes for that inefficiency.
In government failure (also called non-market failure), the inefficient allocation is caused by government intervention or the lack of it. In market failure, there can be different reasons for the inefficiency. Government intervention could be a reason, but it doesn't have to be.
@turkay-- I think you have confused the terms "state failure" and "government failure." The example you gave about Somalia describes state failure which is separate than government failure.
Actually, in the most basic sense, any kind of failure is talking about the same type of thing. Just as the article described, it's when that institution does not serve the purpose it's intended for. If the state doesn't serve it's purpose of providing for and protecting it's citizens, it's state failure.
If a government institution doesn't serve the purpose it was established for in the first place, then it is also a failure. Similarly, if a market doesn't serve the purpose of making profits, that market has failed.
So the major similarity between all of these is that, as institutions, they have not done what they were supposed to do. It just so happens that government intervention in the market is the major reason for market failure.
I thought that government failure means that a government literally fails because it is no longer able to serve the functions that a government is supposed to serve.
I hear this term a lot in the news when they're reporting about conflict states with insurgencies like Somalia. I believe the government in Somalia failed several times because they lost physical and political control of some regions of the country to various warlords and insurgents. The government was also not able to provide for the essential needs of the people.
But what I knew to be government failure sounds different than what the article described which seemed much more related to the economy. The government and the economy are closely related and failure in one will surely have some affects on the other. I guess that's why I'm a little confused about which situations would fit into these two categories.
Can you provide some other examples of government failure?
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