Market Failures vs. Political Failures

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Given that it is usually easier to identify inefficiency than to describe an efficient situation, here are some of the most common failures of both market (laissez-faire) and political allocations (the heavy hand of the government).

Market Failures vs. Political Failures
Market Failure	Political Failure
1. Uncertainty about the future.	1. Uncertainty about the future.
2. Rational ignorance about consuming and investing.	2. Rational political ignorance.
3. Free riders for public goods.	3. Rational apathy and nonvoting.
4. Asymmetric information and principal–agent problems (e.g., between firms and employees).	4. Asymmetric information and principal–agent problems (e.g., between constituents and their elected representatives).
5. Externalities and pollution.	5. Tie-in-sales aspects of voting. All voting systems fail to fine-tune spending patterns to reflect the intensities of voters’ preferences.
6. Collusion and the exercise of monopoly power.	6. Disproportionate political power for special interests.
7. Inequity in the distributions of income and wealth.	7. Majorities may inefficiently or inequitably vote against the interests of minorities.
8. Fosters greediness and unhealthy competitiveness.	8. Fosters bureaucracy and empire building.

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Author: Ralph Byrns

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