A defining feature of government failure is where it would be possible for everyone to be better off (Pareto improvement) under a different regulatory environment.
[12] Later, due to the popularity of public choice theory in 1970s, government failure attracted the attention of the academic community.
While a perfectly informed government might make an effort to reach the social equilibrium via quality, quantity, price or market structure regulation, it is difficult for the government to obtain necessary information (such as production costs) to make right decisions.
[13] Political decisions may be made for short-term gain in response to interference by special interest groups.
Public funds could be pushed to influence voters or time could be allocated to pursue personal inequalities instead of actual market failures.
Ultimately, such self-serving behavior detracts from addressing critical societal issues, leaving citizens disillusioned and the country vulnerable.
Costs that are included are; Tax collection through government departments, law enforcement and policy creation.
All these costs allocations are quite broad however a lot of people are required to run a secure and efficient system.
This means that Administration and enforcement costs for a project can be over or under assumed and therefore a market failure can therefore be dismissed easily or over analyzed (however benefits can also be credence-benefits).
[3] Crowding out is when the government over corrects the market failure leading to the displacement of the private sector investment.
Rent extraction positively correlates with government size even in stable democracies with high income, robust rule of law mechanisms, transparency, and media freedom.
Subsidies can also lead to misuse of scarce resources as they can help inefficient enterprises by protecting them from free market forces.
Black market of labor and higher unemployment among uneducated and poor are possible consequences of minimum wage while deterioration of residential buildings might be caused by rent ceiling and subsequent lack of incentive for landlords to provide the best services possible.
Furthermore, as opposed to private monopolies, the threat of bankruptcy is eliminated, as these companies are backed by government money.
The companies are thus not facing many efficiency pressures which would push them towards cost minimisation - causing a social inefficiency.
A leading example of governmental failure can be seen with the consequences of the European Union's Common Fisheries Policy (CFP).
Set up to counteract a concern of balancing natural marine resources with commercial profiteering, the CFP has in turn created political upheaval.