Government Failure vs. Market Failure

A great AEI-Brookings joint study by Clifford Winston (http://www.aei-brookings.org/publications/abstract.php?pid=1117) was released not too long ago presenting extensive evidence that government programs that claim to address "market failures" suffer extensively from a problem of their own: "government failure."

An additional thirty years of empirical evidence on the efficacy of market failure policies initiated primarily by the federal government, but also by the states, suggests that the welfare cost of government failure may be considerably greater than that of market failure. More specifically, the evidence suggests that policymakers have attempted to correct market failures with policies designed to affect either consumer or firm behavior, or both, or to allocate resources. Some policies have forced the U.S. economy to incur costs in situations where no serious market failure exists, while others, in situations where costly market failures do exist, could have improved resource allocation in a much more efficient manner.

Disappointingly, Winston, after extensive research of "scholarly assessments of federal policies that are published in journals and books", was forced to conclude:

My search of the evidence is not limited to policy failures; I report success stories, but few of them emerged from my search..

Worse, his conclusions are not even terribly controversial in economic circles.

my assessment of the empirical evidence reveals a surprising degree of consensus about the paucity of major policy successes in correcting a market failure efficiently. In contrast to the sharp divisions that characterize debates over the efficacy of macroeconomic policy interventions, I found only a handful of empirical studies that disagree about whether a particular government policy had enhanced efficiency by substantially correcting a market failure. [...] researchers who used vastly different methodological techniques to assess specific policies often reached very similar conclusions.

Let me just pick out a few examples of his findings, starting with transportation policy:

Public management of roads is characterized by substantial pricing, investment, and production inefficiencies (these issues are discussed in Small, Winston, and Evans 1989). [...] gasoline taxes are an inefficient pricing mechanism because they are basically invariant to changes in traffic volume throughout the day and are inversely related to a truck’s weight per axle (that is, trucks with more axles that reduce pavement damage get lower fuel economy and pay higher gasoline taxes). [...] Small, Winston, and Evans (1989) estimated that replacing gasoline taxes with marginal cost congestion tolls and pavement-wear taxes and building roads to optimal pavement thickness would generate an annual welfare gain of $23.9 billion. Congestion tolls that vary by time of day and location would reduce delays and make efficient use of scarce road capacity. In addition, efficient highway tolls, which reduce excessive driving during peak periods, would justify a substantial reduction in (inefficient) highway expenditures.

How about agriculture?

Government regulation (subsidization) of [agricultural] markets cannot be justified on economic grounds; thus, commodity price support programs basically amount to transfers from consumers to producers that generate annual net welfare losses of $3.0 billion to $12.4 billion (Rausser 1992; Robinson, Kilkenny, and Adelman 1989). The dairy support program also generates welfare losses that approach $1 billion a year (Helmberger and Chen 1994).

How about trade and tariffs?

Feenstra (1992) draws on several studies and puts the annual net cost to the United States of tariffs and quotas between $12 billion and $18 billion. To add insult to injury, import prices are raised by the 1920 Jones Act, which increases the cost of transporting imported goods by requiring that coastal shipping be on U.S.-built and U.S.-owned vessels.

How about safety regulations?

NHTSA has tried to inform automobile consumers by making the results of automobile crash tests available to the public. Hoffer, Pruitt, and Reilly (1992) argued that consumers paid little attention to the government’s information and relied on other sources of safety performance such as trade publications. Apparently, this was a wise choice because the authors found that NHTSA’s crash test data were a poor predictor of vehicle safety.

Or:

Kniesner and Leeth (2004) estimated that the costs of [the Mine Safety and Health Administration's] activities are more than double the benefits. Its budget is large—on a per establishment basis, it is 400 times larger than OSHA’s budget—and its deterrence is weak.

How about environmental regulations?

Hamilton and Viscusi (1999) concluded that [...] Superfund failed to allocate its resources to the environmental problems posing the greatest social costs. For example, 95 percent of expenditures were used for projects that eliminated only 0.5 percent of the cancer risk at those waste sites. The median cost per life saved, $388 million, is two orders of magnitude above conventional estimates of the value of life (Viscusi 1993; Viscusi and Aldy 2003).

Or:

The National Appliance Energy Conservation Act of 1987 set national energy efficiency standards for major appliances. Sutherland (1991) pointed out that the standards raised consumers’ initial capital costs and lowered operating costs for these appliances, but he found no evidence that this trade-off improved on the efficiency of appliances that would exist absent the standards. Newell, Jaffe, and Stavins (1999) decomposed the sources of energy efficiency for room air conditioners and gas water heaters and found that increases in energy prices and better technology accounted
for most of the improvements; energy efficiency standards appear to have had a small effect.

Or:

To the extent that it has increased fuel economy for new vehicles, CAFE has actually encouraged some people to drive more, and by raising vehicle prices the standards have increased emissions because they have encouraged people to retain their used vehicles longer (Kleit 2004; Portney and others 2003). [...] Godek (1997) found that CAFE caused consumers to shift to light trucks (vans, minivans, and SUVs) instead of small cars and estimated that 50 percent of the increase in the share of light trucks since the 1970s could be attributed to CAFE, thereby offsetting 75 percent of the vehicle weight that would have been lost otherwise. The shift to light trucks increased fuel consumption, and although light trucks increase their occupants’ safety, they increase injury severity from a collision to occupants of smaller vehicles and to pedestrians, bicyclists, and motorcyclists.

The hits just keep coming. I strongly recommend that you read the whole thing.
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