Arnold Kling makes an important point when discussing market failure on Econlog:
Instead, it says that every industry is dysfunctional in its own way. But every industry is dysfunctional.
He points out that this may lead people to the conclusion that:
And in every case, experts wielding the power of the state are presumed to make things better.
Now, to the sheer majority of people this conclusion would seem suspect – which in itself tells us that there is something amiss. The “something” that is missing is the imperfection of government policy.
Yes markets fail, but the state isn’t able to perfectly correct for such things. In order to justify intervention, we need to be able to say that the cost of market failure exceeds the costs associated with government intervention.
This raises an interesting issue – if it is up to policy makers to make a judgment call on these costs, and for some reason they believe that their abilities are greater then they are are (say because they don’t face punishment if they fail, and so never have to update their beliefs with regards to their abilities) then we are more likely to get government intervention when it is inappropriate then no intervention when it is appropriate.
That is just a little point to keep in mind – and is probably one of the justifications for having a Treasury department that looks at the quality of spending rather than just balancing the books.