When should government intervene in market activity? When is it best to let market forces simply take their natural course? How does existing empirical evidence about government performance inform those decisions? Brookings economist Clifford Winston uses these questions to frame a frank empirical assessment of government economic intervention in Government Failure vs. Market Failure: Microeconomics Policy Research and Government Performance.
Markets "fail" when it is possible to make one person better off without making someone else worse off, thus indicating some degree of inefficiency. In economics parlance, Pareto optimality has not been achieved. On the other hand, governments "fail" when an economic intervention proves to be unwarranted, either because markets are performing adequately or public policy does not correct a market failure efficiently. In such cases, government intervention may actually exacerbate a problem or produce unintended negative results. Winston concludes that the cost of government failure may actually be considerably greater than the cost of market failure: "My search of the evidence is not limited to policy failures. I will report success stories, but few of them emerged." Government failure may result in missed opportunities, wasted resources, and waning public support.
The author, a well-respected economist who edited the Brookings Papers on Microeconomic Activity, calls for more economics research that is geared to questions of public policy: "The economics profession should encourage a broader range as well as different styles of research by giving more respect to high-quality policy studies on specific and perhaps small issues that accumulate in importance." He cites evidence that inefficient microeconomics policies are of vital importance because they are a drag on growth and development.