ABSTRACT
This entry presents a contrast between the theory of market failure and the theory of government failure and provides a few key illustrations of potential inefficiencies of political institutions in determining resource allocations. It is suggested that various government failures may be usefully related to the three fundamental structures of all social choice mechanisms, namely, the decision-making structure, the information structure, and the incentive structure. The final sections briefly summarize the existing criticisms of the theory of government failure and suggest that emerging empirical work will greatly aid policy makers in their choice between market and political allocation. For example, strong evidence now exists that support the comparative efficiency of private enterprise over government enterprise.
