Market Failure Versus Government Failure

Here’s an interesting article from the Washington Post looking at the government’s ability to handle market failures.

“How well does government do in helping the market to improve what it does?” asked Clifford Winston, an economist at the Brookings Institution and the author of the 2006 book “Market Failure Versus Government Failure.” “The research consistently finds that, in fact, government efforts to correct market failures have little effect, or actually make things worse.”
“There is a tendency for people to say, ‘If things are safer, then I will take more risk,’ ” he added. “It does not have to involve government interventions: Drugs are developed to reduce blood pressure, so people say, ‘Okay, I can eat more, and it does not matter if I gain weight, because I can take this pill.'”

I think people are inherently poor judges of risk.

Previous research has shown that people drive faster in vehicles that feel safer, attempt to bike on more dangerous terrain when they wear helmets and pay less attention to infants being bathed when the children are in seats that are said to reduce the risk of drowning.
Winston does not believe in one-size-fits-all solutions — whether interventionist approaches that liberals favor, or the hands-off strategies that conservatives prefer. Rather, he argues that solutions need to be tailored to produce measurably successful outcomes.
He once studied the effect of installing air bags in cars at a time when automakers were offering customers the option of buying cars with and without the safety devices. Winston found that people who bought cars with air bags tended to be the safest drivers to begin with. And now, lulled into a sense of security, they tended to drive faster, effectively canceling out the safety benefits.
The wrong lesson to draw from this is that air bags are useless. The right lesson is that air bags can improve safety when they are targeted at the riskiest drivers. As the safety devices become standard issue, for example, risky drivers are automatically protected. And as the safest drivers stop feeling they are extra safe, they may take their foot off the gas.

Posted by on June 23rd, 2008 at 1:57 pm


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