The CORE Econ website uses essential cookies to make our website work. You may disable these using your browser settings but this may affect website functionality (such as your access to logged-in resources). We would also like to use analytics cookies to help us improve the functionality of our website and improve your user experience. These analytics cookies will be set only if you accept. We do not sell or otherwise transfer personal data or usage data to any third parties or use it for any other purpose. For more detailed information about the cookies we use, see our Privacy policy.

Unit 10 Women’s right to vote and the reduction in child mortality in the United States

10.11 The persistence of unfairness and market failures in democracies: Why governments fail

When economists analyse market outcomes according to principles of fairness and Pareto efficiency, we typically identify policies that a benevolent social planner would adopt. When we observe market failure—outcomes that are not Pareto efficient—we think of taxation or regulation policies to ensure that potential mutual gains are realised; where the distribution of resources appears to be unfair we think of policies that redistribute income or wealth. If democracy results in elected governments whose policy objectives reflect the preferences of voters, we would expect those governments, likewise, to address problems of market failure and unfairness.

Yet in other units we have documented cases in which economic outcomes in democratic countries are Pareto inefficient. And we know that citizens in many democratic countries think the distribution of wealth or income is unfair.

This is a puzzle. If government action could realize potential gains, and the citizens in a democracy would prefer that it did, why do these inefficiencies persist in a democratic society with a capitalist economy? The short answer is that governments, like markets, may fail.

Why governments fail

Fixing some problem of Pareto inefficiency or perceived unfairness will happen only if:

  • It is economically feasible: The policy to fix the problem, if implemented, must work.
  • It is politically feasible: Those who control government policy must want the policy to be implemented.
  • It is administratively feasible: The government must have the capacity to implement the policy.

Economic infeasibility

Given people’s preferences and the information available to private economic actors, there may not be a feasible set of policies that would sustain an efficient and fair outcome. For a policy to have economic feasibility, the policy outcome must be a Nash equilibrium, which means no actor can improve its position by changing its behaviour.

For example, a government that tried to enforce perfect competition in every industry would fail. Since firms are free to advertise, and to differentiate their products, it is impossible for the policymaker to legislate that they should be price-takers. And no macroeconomic policy can entirely eliminate unemployment, given that the threat of unemployment motivates people to work hard and well (Section 1.8).

Political infeasibility and special interests

Even if a policy is economically feasible (a Nash equilibrium) and could be implemented administratively, the government may choose not to adopt it because of opposition by groups (including members of the government itself) that would be harmed by the change, which would be the case if certain groups benefit from the unfairness or the inefficiency.1

In the next two sections, we will consider how economic and political infeasibility can prevent fair and efficient policies from being introduced.

Government capacity

Even if there is an economically and politically feasible policy that would address a problem if it were adopted and implemented, this may be impossible in practice due to the administrative capacity of government officials. Governments may lack the capacity to collect tax revenue efficiently and honestly, to enforce policies through the judiciary (including anti-monopoly policy), and to deliver public services such as schooling and health.

Question 10.8 Choose the correct answer(s)

Read the following statements about economic feasibility and choose the correct option(s).

  • Economically feasible policies that solve the problem must be possible to implement in practice.
  • For a policy to have economic feasibility, it must produce a Nash equilibrium and sustain a fair and efficient outcome.
  • Economically feasible policies solve the problem and are politically acceptable.
  • Economically feasible policies must be able to make someone better off without making anyone else worse off.
  • This description refers to administrative feasibility, which some policies can lack. Economic infeasibility refers to policies that can be implemented but do not have the desired outcomes.
  • This is the definition of economic feasibility. Note that an economically feasible policy may be impossible given the information available to the policymaker and/or people’s preferences, or there may be unintended consequences.
  • Some policies may be able to solve the problem and could be introduced in practice, but political pressures may prevent their adoption. For example, between 1815 and 1846, the UK parliament maintained a series of ‘Corn Laws’ that kept food prices high. As a means of lowering food prices, their abolition would have been economically and administratively feasible. But the Corn Laws benefited landowners who dominated parliament at the time and resisted giving up the benefit for many years.
  • This is the definition of a Pareto improvement, not economic feasibility.

  1. Daron Acemoglu and James A. Robinson. 2013. ‘Economics versus politics: Pitfalls of policy advice’. The Journal of Economic Perspectives 27 (2): pp. 173–192. ↩