Market Failure 7: Government Failure (There’s Always a Catch)


James K

James is a government policy analyst, and lives in Wellington, New Zealand. His interests including wargaming, computer gaming (especially RPGs and strategy games), Dungeons & Dragons and scepticism. No part of any of his posts or comments should be construed as the position of any part of the New Zealand government, or indeed any agency he may be associated with.

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46 Responses

  1. Avatar Oscar Gordon says:

    Again, I applaud this effort!Report

  2. Avatar Brandon Berg says:

    The medallion system creates a relatively homogeneous constituency, medallion owners, who now have strong incentives to oppose any reform. Worse – the more the system restricts supply, the more the medallion is worth and the harder that constituency will fight to retain their privilege.

    One particularly pernicious aspect of this system is that there’s a very real sense in which taxi drivers aren’t privileged. I imagine the system varies from city to city, but in many (most?) the medallions are tradeable, so the value of the oligopoly pricing is baked into the cost of the medallion. Which is to say, the government, as it so often does, has managed to create a system in which consumers are losers and producers are not actually any better off. The actual winners, I guess, would be either medallion owners who got in on the ground floor and have long since cashed out (if the government sold them cheap), or former taxpayers or tax beneficiaries if they were auctioned off.Report

    • Avatar Jaybird in reply to Brandon Berg says:

      The scarcity premium is a hell of a thing.

      By removing artificially imposed scarcity, you dramatically allow an overall increase of (what term do we want to use… wealth? non-monetary wealth?) whatever-we-want-to-call-it at the cost of a small number of actors who personally benefit greatly from being a recipient of the dispensers of the artificially scarce resource.

      The folks who dispense the thing that is intrinsically worth something but kept scarce will always create a stink when those constraints are removed. And given that the folks who dispense the thing are individuals and given that the benefits from the removal of the artificial scarcity are distributed and, thus, a lot less easy to keep track of…

      Well, the scarcity premium is a hell of a thing.Report

    • Avatar DavidTC in reply to Brandon Berg says:

      Limiting taxis always stuck me as odd, especially since considering the supposed justification for it was ‘Keep taxis from using all the space in the streets’. I.e., the theory is, with unlimited taxis, we’d get a lot more of them, to the point that other cars were pushed out.

      To which I have to say: Wait, what’s the problem again?

      The actual problem is that there appear to be too many people using a common resource, aka, the streets, and as they can’t build more streets, the solution to that would appear to be to limit *all* uses of that resource. I.e., make everyone who wants to drive around in New York City buy a medallion allowing that. (Instead of having to get police to check them constantly, make them RFID and put up sensors on bridges and tunnels.)

      Yes, we’d end up with more taxis and less private cars than currently, especially if it was purchased by auction, but isn’t that better anyway? If the choice is between things that can be used by multiple people, and things that can’t, let’s go with the things that can.

      I mean, I’m all for the government skewing incentives, but taxi medallions seem to skew the limited number of private cars NYC can handle *the wrong way*, toward private cars.Report

      • Avatar DensityDuck in reply to DavidTC says:

        “potential overuse” is the stated reason for limiting taxi medallions.

        You have correctly noted that this reason is garbage.Report

        • Avatar DavidTC in reply to DensityDuck says:

          Well, it’s not garbage, per-se.

          City centers have gotten increasingly crowded. London has a city car-toll for a reason, although that’s per day.

          Unlike most things the government wants to limit, NYC can’t restrict that via expensive tags (Too much commuting.) or expensive gas tax (Same reason.)

          It would be entirely reasonable for NYC to do something to limit the amount of cars in a city, and a ‘You must have one of these on your car to operate it in NYC’ thing isn’t a bad way to do that.

          In a way, it makes more sense than daily tolls, which would have to be via automated RFID anyway!

          In fact, with an automated system, there could be all sorts of different levels. ‘You can go in and out of the city as much as you want.’. ‘You can only go into the city during off-peak hours and five times a year during peak’, etc. And bill people for overages. Hey, that sort of thing works (mostly) for cell phones, how about using it for something that actually *can’t* add capacity, instead of using it for lazy-ass cell phone companies that just don’t want to?

          What *is* garbage is only doing medallions for taxis. What is *also* garbage is doing it as some sort of permanent thing instead of just having people re-buy them every year. (I’m not entirely sure there’s ever a good reason for the government to sell *transferable* licenses.)Report

          • Avatar DensityDuck in reply to DavidTC says:

            You’re right that it’s not garbage per se.

            It’s like you’re telling us that protection money is actually a good thing when it’s described as “taxes going to fund police and fire departments”.Report

  3. Avatar Joe Sal says:

    Excellent series!Report

  4. Avatar Damon says:

    Gov’t not only has no incentive to respond to failures, they have every incentive to take advantage of it. That’s how bureaucrats build power and increase their budgets. Since the gov’t has no incentive to manage costs, and their incentives are reversed from “normal”, they spend all their budgets whether they need to or not so as to prevent next year’s budget from being cut. If there is a failure, the solution is to add more staff and money to “form a task force” and find out why and then add more staff and budget to manage the problem with new regulations. Transparency to the customer (the taxpayer) is nothing they want. Data? that might indicate those bureaucrats aren’t needed. Can’t have that.

    “Which means that ultimately you have to limit your ambitions as to what government can achieve” Really? EVERYONE seems to want something from gov’t. I’ve rarely seen a gov’t employee or ‘crat say they couldn’t do what was wanted. Just takes more money and staff. We learned long ago, we can dip our hand into other people’s pockets and take their money.Report

  5. Avatar Saul Degraw says:

    I would say that idealized alternative cuts both ways. A lot of libertarian discussion including Bryan Caplan strikes me as being very utopian.Report

  6. Avatar North says:

    Also implicitly baked into this excellent post is an explanation for why liberal democracies are superior governing methods to their alternatives; technocratic, theological or strong man autocracies. If voters are bad at understanding issues and transmitting their preferences to policy makers non-democratic systems are exponentially worse. Even your most golden hearted autocrat will have to contend with a natural circle of advisors, ministers and friends who are generally incapable of telling said autocrat what the genuine issues and desires of his or her citizenry are. Democracies may be myopic but the alternatives are flat out blind.Report

    • Avatar Joe Sal in reply to North says:

      Any king, president, pope, or parliament can hold court with commoners about the issues of a nation, and from this I don’t agree with the blindness of one over the other.Report

    • Avatar James K in reply to North says:


      It does point to advantage of liberal democracies, and the reason why that form of government seems to outperform the available alternatives, but it can show off some of the weaknesses too. When voters misdiagnose the causes of a policy problem they can demand solutions that are unhelpful or even counter-productive. Admittedly this can be a problem for less democratic governance systems as well.Report

  7. Avatar Joe Sal says:

    “If all you do is think in terms of more or less government involvement, you may end up becoming the unwitting accomplice of a group of rent-seekers”

    Is there a study that defines a amount of rent seeking in areas that have no government, versus an area that is in the late/developed stages of capitalism(2)?

    (2) an economic system that features a symbiotic relationship between big business and government.Report

    • Avatar James K in reply to Joe Sal says:


      I don’t think there are enough areas with no government to adequately study that question, especially considering that regions with no government tend to be different from nation states in many different ways.Report

      • Avatar Joe Sal in reply to James K says:

        So there is a possibility that minimal/no government may be a option to reduce rent seeking, but there is just not enough information to prove so?

        This stated with all the hand waving caveat of ‘it’s complicated’ thrown into the mix. Even so, the maximal government crowd may be producing a problem without knowing it.Report

        • Avatar DavidTC in reply to Joe Sal says:

          In areas without government, I’d expect less ‘traditional’ rent-seeking, and more outright extortion.

          When there is government, a rent-seeker has to, for example, purchase a farm and then get someone to live there, and say to them ‘Pay me each month or the government will evict you.’.

          When there isn’t government, a guy can just hire some guys with guns and go to someone else’s farm and say ‘Pay me each month or I will burn your crops and eventually kill you.’. People don’t need to rent-seek when they can just *demand* money without any legal justification.

          And I don’t know what is meant by ‘minimal government’ there…normally, people who say that include ‘enforcing property rights’ in that, which means rent-seeking should logically be just as possible as with a larger government. Except minus the counterweight of a government that often tries to reduce rent-seeking. So, logically, rent-seeking should be slightly higher.

          But if this ‘minimal government’ didn’t recognize or issue various forms of property, for example it didn’t have patents or (We were just talking about this somewhere) taxi medallions, obviously rent-seeking wouldn’t happen for those things anymore. So removing ‘artificial’ forms of property from existence would reduce rent-seeking, especially since almost all artificial property is deliberately scarce (In fact, the entire reason we started treating non-physical items *as* property was to make them scarce) so is very easy to use for rent-seeking.

          Sadly, a lot of people who talk about wanting ‘minimal government’, especially most extreme libertarians, seem to be fully in favor of intellectual property, despite the many problems there are with our current system, and despite the fact the entire concept can’t fit under ‘You can do anything you want as long as you don’t harm me’. (I blame Ayn Rand for this.)Report

          • Avatar DensityDuck in reply to DavidTC says:

            Intellectual property is no more fanciful than any other sort of property.

            “I have to ask for permission to do stuff” is not inherently a problem.

            “the entire concept can’t fit under ‘You can do anything you want as long as you don’t harm me’. ”

            Of course there’s harm. You’re deriving benefit from use of my property, without my permission and without compensating me for it. It is exactly as harmful as if you took a shortcut across my yard to get from your house to a restaurant instead of walking around the block.Report

            • Avatar DavidTC in reply to DensityDuck says:

              Intellectual property is no more fanciful than any other sort of property.

              Yes it is.

              All property is fanciful, and intellectual property shares the same fancy as any other property. All property rights are imaginary constructs by the government.

              But intellectual property has more ‘fancy’, on *top* of that.

              Of course there’s harm. You’re deriving benefit from use of my property, without my permission and without compensating me for it.

              Someone benefiting from your stuff without your permission is not what the word ‘harm’ means. Harms means someone has *reduced* your ability to use your stuff.

              Also, that is absurdly circular logic, and the phrase ‘my property’ is doing a lot of work there. There is physical property, and there is intellectual property.

              Copyright infringement is normally done via physical property the *infringer* owns. It stopped being your physical property when you sold me the CD.

              Meanwhile, I merely own a copy of your intellectual property, not your actual intellectual property, so can’t actually harm that, either. (1)

              It is exactly as harmful as if you took a shortcut across my yard to get from your house to a restaurant instead of walking around the block.

              Erm, wait, your example is sorta dumb.

              It is actually *entirely legal* to use someone else’s property without compensating them for it, in general, as long as I don’t damage their stuff or cost them something.

              If someone leaves their sunglasses sitting at my desk, I can put them on, legally. I can’t *walk off* with them, and I can’t refuse to hand them back, either of those are theft, but I can *use* them. That is not a crime.

              If I’m walking through a parking lot, I can legally sit on the bumper of some truck and tie my shoes, and even if the owner sees that and calls the cops, I have literally committed no crime, assuming I have not somehow damaged his truck.

              It is even entirely legal for me to *take a copyrighted CD that someone owns physically, and someone else owns the copyright on*, and play it without permission if they left it in a publicly accessible CD player or something. (Barring a situation where that’s legally a ‘public performance’.)

              There are a few *specific* things where this is not always true, like real estate, but usually *only* if the owner of thing has indicated they don’t wish people to be able to use it. (In the case of real estate, via fences and walls and no trespassing signs.)

              But even *there*, while trespassing might be a *crime*, it’s not because someone ‘derived benefit’ from the owner’s property. It’s because trespassing *deprives the owner* of aspects of their property, namely, privacy and security.

              That is, basically, the principle of property rights. Ownership of a thing == the ability to stop people from reducing your *use* of that thing.

              Whereas copyright is the ability to stop people from, basically, stopping people from reducing your ability to sell copies of that thing by making exact duplicates of stuff they own. It’s a whole nother level of imaginary rights.

              1) Incidentally, I refuse to discuss copyright with anyone who thinks we merely ‘license’ all copyright stuff. That is not how the law works with copyright normally, and there’s a few reasons it isn’t true *even when* the stuff claims to be licensed and not sold, especially when they try to spring it on you after the sale. And I’ve gotten in so many dumbass discussions to correct that misconception that I have given up, and if you have that misconception, we’ll just sorta stop here. Again, no idea if you think that or not, I’m just warning…I’m done spending time and effort explaining that over and over.Report

              • Avatar DensityDuck in reply to DavidTC says:

                “Someone benefiting from your stuff without your permission is not what the word ‘harm’ means. Harms means someone has *reduced* your ability to use your stuff.”

                Funny how you trash me for using a definition of “my property”, and then you use a very self-serving definition of “harm”, that turns out to–very conveniently!–exclude the harm that is suffered through uncompensated use of property.

                “It is actually *entirely legal* to use someone else’s property without compensating them for it, in general, as long as I don’t damage their stuff or cost them something.”

                uuuuuhhhhhh no it ain’t hoss. You might be thinking of criminal trespass, which requires specific intent to damage property or interfere with activity or a refusal to leave the property when challenged, but it’s still actionable to walk across someone’s yard.

                And sure, it’s a tortuous action and not a criminal one, and the cops won’t arrest someone just for being on your lawn (you have to file a lawsuit if you don’t want to challenge them directly for some reason) but at the end of the day it isn’t legal to infringe on someone else’s property.

                “It is even entirely legal for me to *take a copyrighted CD that someone owns physically, and someone else owns the copyright on*, and play it without permission if they left it in a publicly accessible CD player or something.”

                Sure! Because during the time period in which you have that CD, the nominal owner cannot also play it. The physical token that represents the bundle of reproduction rights has been transferred to you.

                “All property is fanciful, and intellectual property shares the same fancy as any other property. All property rights are imaginary constructs by the government.”

                So you say “all property is fiction!” and then you say “but intellectual property has no physicality and therefore can’t expect any protection!”

                Please to be having consistency of the argument, sir. Either property is fiction (in which case we can make up any rules we want, even extending property rights to nonphysical concepts) or property is physical (in which case it’s not valid to say “property is fiction”).

                PS you’re trying very hard to justify that time you took out a camera and started photographing that dude’s paintings at the farmer’s market.Report

          • Avatar James K in reply to DavidTC says:


            While there are issues with IP as it stands, there are very good policy reasons for having it.Report

            • Avatar DavidTC in reply to James K says:

              Oh, I’m not opposed to all IP.(1)

              I just find it very odd how often extreme libertarians are okay with the government telling people what they can and cannot do with their own property, simply because the government invented ‘intellectual property’ inside that thing.

              They can perhaps justify copyright as the copyright holder is, hypothetically, selling some rights and not others (Although this is not actually how copyright works.) and trademarks could perhaps be justified as anti-fraud.

              But I just remain completely baffled as to how extreme ‘The only justified action of the government is to protect people’ libertarians are okay with *patents*, which do *not* require any sort of purchase from the patent holder where the purchaser could have (hypothetically) agreed not to copy it, nor do they require misleading anyone. It’s just flat out the government telling them they can’t do something with their own property.

              1) Here are the two main forms of IP I have serious issues with. a) Repeatedly extending copyright to no benefit…does anyone seriously think how much money ‘Star Wars VII’ is going to make in 2100 was an important consideration to Disney making that movie? (And let’s not get started on how that’s supposed to work retroactively.), and b) Software patents, which never were legal anyway, and I am very glad to see the high courts have *finally* noticed what has been going on.Report

        • Avatar James K in reply to Joe Sal says:


          There are intermediate options between “no government” and “all of the government”, also its probably not helpful to think of there as being a straightforward link between government activity and rent-seeking. For another, its really not useful to think of government activity as all being the same here. Some things governments do will encourage rent-seeking, others may reduce it.Report

          • Avatar Joe Sal in reply to James K says:

            Well, part of my original position was considering if there is a link. I might find it helpful if it indicated better efficiency in turning the dial closer to 11 or 0 to make the system more efficient when the sum of parameters are weighed.

            If it is an unknown we continue to build systems and create policy in the midst of it.

            I do greatly appreciate your input on the matter.Report

            • Avatar James K in reply to Joe Sal says:


              Probably better to think of it less as a dial than as a menu – some items promote rent seeking wile others discourage it. For example – stopping brigands from extorting resources from people is anti-rent-seeking, while systems that grant a lot of discretion to figures in government are likely to promote rent-seeking (all the way up to full-blown corruption in some cases).Report

              • Avatar Joe Sal in reply to James K says:

                Well, I guess we get to a finer point, is government the most efficient tool to lend discretion (on the menu)?

                Also to the brigand, is it the government that stops them, or the officers pay that stops them?Report

  8. Avatar DensityDuck says:

    It’s worth pointing out that even taxi drivers prefer Uber and Lyft. If anything, they’d *rather* use those services because they take home more money! Most of the fares they charge go on to the medallion holder.

    “Caplan’s model helps fill in a few gaps in standard Public Choice Theory, for example why interventions like agricultural tariffs are often electorally popular even though they benefit farmers at the expense of anyone who buys food.”

    Even *this* is a rational, utility-maximizing choice, if you take into account the low-information, limited time-window nature of most voters.Report

  9. Avatar Patrick says:

    “However, since no one person has any real effect on the outcome of an election, it hardly makes sense to think carefully about the consequences of your vote. As such, voting behaviour is even less likely to be rational than market behaviour. ”

    There is a wrinkle to this, though, which I’ve always thought was a problem with the way folks have described Caplan to me (full disclosure: I haven’t read Bryan Caplan’s Myth of the Rational Voter, so I have no idea if he addresses this or not).

    You can’t assume that voters are a monolithic block in terms of how they decide to vote. In fact, I think it’s pretty well established that there are different types of voters in terms of their assessment behaviours.

    A lot of times the apparent irrationality of a voter block is a problem because the observer talks about the expression of the voter block as being indicative of the population block (see: What’s the Matter with Kansas).

    But based solely on turnout numbers, that’s clearly a completely insane assumption. Elections aren’t entirely predictable by any means… but if you rely much more on patterns of behavior than surmises about motivations you get a lot closer to being able to predict electoral outcomes.

    I mean, anybody who was paying attention to the history of electoral patterns knew that the GOP was going to take up a bunch of seats in 2010, simply due to the patterns of *who* votes *when*.

    So a GOP Congressperson getting voted in during the 2010 election is probably far less of a case of “were the constituents in this Congressperson’s district acting rationally” and much much more a case of “were the **actual voters** in this Congressperson’s district acting rationally”. Similarly, “ZOMG why is this Congressperson ignoring the Will of the People” becomes a lot less interesting of a question when you look at who actually voted in the Congressperson in the first place.Report