What Is Government Failure?

Barak Orbach*
The phrase government failure as a term of art originated in the
critique of government regulation that emerged in the 1960s. This
critique premised that market failures were the only legitimate rationale for regulation. Although the phrase is a popular currency in
scholarship and politics, people attribute to it different values. As a
result, all seem to expect the government to fail, many believe that
government inaction cannot constitute a failure, and alleged failures
tend to be disputed. This essay seeks to establish a coherent meaning
for the term government failure and its relatives (e.g., government breakdown, regulatory failure).

I. Introduction
In Capitalism and Freedom, Milton Friedman explained why
the scope of the government must be limited.1 The existence of a
free market, Friedman wrote, does not . . . eliminate the need for
government. On the contrary, government is essential both as a forum
for determining the rules of the game and as an umpire to interpret
and enforce the rules decided on. What the market does is . . . minimize the extent to which the government need participate directly in
the game.2 Friedman firmly believed that it was not an accident that
so many . . . government reforms [go] awry.3 The central defect of

Professor of Law. The University of Arizona College of Law.

www.orbach.org. This is the second essay in the Series What Is ? that explores
the meaning of basic terms in regulation. See Barak Orbach, What Is Regulation?,
30 YALE J. REG. ONLINE 1 (2012). I thank Paul Connell and Sivan Korn for comments and suggestions.
1
MILTON FRIEDMAN, CAPITALISM AND FREEDOM 2 (1962).

44

Id. at 15.

Id. at 196.

What Is Government Failure?

regulatory measures, he argued, is that they seek through government to force people to act against their own immediate interests in
order to promote a supposedly general interest.4 Under this thesis,
the government is likely to fail whenever it interferes with the freedom of choice. Thus, since pretty much all law consists in forbidding [people] to do some things that they want to do,5 the failure is
inevitable.6
The concept of government failure is somewhat peculiar.
People and institutions may fail in their actions, but they may also
fail by not taking action. The phrase government failure, however,
as it is commonly used, connotes ineffective government action,7 implying that less government action is necessarily better.8 In Milton
Friedmans words: [T]he government solution to a problem is usually as bad as the problem and very often makes the problem worse.9
The phrase government failure emerged as a term art is in
the 1960s with the rise of intellectual and political criticism of regula-

Id.

Adkins v. Childrens Hospital of the District of Columbia, 261 U.S. 525,

568 (1923) (Holmes, J., dissenting).
6

See also MILTON FRIEDMAN & ROSE FRIEDMAN, FREE TO CHOOSE: A

PERSONAL STATEMENT 5-6 (1980).
In the government sphere, as in the market, there seems to be an
invisible hand, but it operates precisely the opposite direction
from Adam Smiths: an individual who intends to serve the public interest by fostering government intervention is led by an invisible hand to promote private interests, which was no part of
his intention.
7
See, e.g., CLIFFORD WINSTON, GOVERNMENT FAILURE VERSUS MARKET
FAILURE 23 (2006) (Government failure . . . arises when government has created
inefficiencies because it should not have intervened [in the market] in the first
place, or when it could have solved a given problem or set of problems more efficiently, that is, by generating greater net benefits.)
8

See generally Peter L. Kahn, The Politics of Unregulation: Public

Choice and Limits on Government, 75 CORNELL L. REV. 280 (1990).
9

MILTON FRIEDMAN, AN ECONOMISTS PROTEST 6 (1975). See also

MILTON FRIEDMAN, WHY GOVERNMENT IS THE PROBLEM (1993).

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Vol. 30:44, 2013

tion.10 Building on the premise that the only legitimate rationale for
government regulation is market failure,11 economists advanced new
theories explaining why government interventions in markets are
costly and tend to fail. This line of literature supposedly established
the theoretical foundations of the phrase government failure.
Despite their growing popularity, the phrase government
failure and its relatives (e.g., government breakdown, regulatory
failure) do not have any clear meaning.12 Some use these phrases to
describe government intervention in the private domain that results in
undesirable outcomes. For others, these phrases may also mean lack
of or inadequate government regulation. Yet, many identify a government failure in any perceived societal problem. Thus, people who
use the phrase government failure often disagree with each other
about what a failure means. Neither the prevalence of studies of government failures nor the use of the phrase government failure necessarily says much about the standards of failure.
This essay intends to clarify the general meaning of the term
government failure by focusing on a few properties of failures.

10

See, e.g., Roland N. McKean, The Unseen Hand in Government, 55 AM.

ECON. REV. 496 (1965); Charles Wolf, Jr., A Theory of Nonmarket Failure:
Framework for Implementation Analysis, 22 J. L. & ECON. 107 (1979). See also
BARRY GOLDWATER, CONSCIENCES OF A CONSERVATIVE (1960) (introducing a
general critique of government regulation).
11

See Francis M. Bator, The Anatomy of Market Failure, 72 Q. J. ECON.

351 (1958). Executive Order 12,866 states that material failures of private markets
to protect or improve the health and safety of the public, the environment, or the
well-being of the American people may establish a compelling public need for
regulation. Exec. Order No. 12,866 1.
12

See generally CARY COGLIANESE ED., REGULATORY BREAKDOWN: THE

CRISIS OF CONFIDENCE IN U.S. REGULATION (2012).

46

What Is Government Failure?

Figure 1

Source: Google Ngram.13

II. Inaction as a Failure
Can government inaction ever be a failure? A byproduct of
the controversy over regulation is an artificial distinction between action and inaction.14 On one side of the controversy, people see overregulation. On the opposite side, people observe insufficient regulatory safeguardstoo little regulatory action or frequent inaction.15
These opposite perspectives delineate the approaches to government
inaction. Some posit that inaction cannot be scrutinized, let alone
considered a failure,16 while others maintain that similar rules should
apply to action and inaction.17

13

For the methodology and its limitations, see Jean-Baptiste Michel et al.,
Quantitative Analysis of Culture Using Millions of Digitized Books, 331 SCI. 176
(2011).
14

The analysis of the distinction is of course rather old. For example,

Thomas Aquinas distinguished between sins of commission and sins of omission,
arguing that the latter are less grievous than sins of commission, but stressed that
inaction may constitute a sin. THOMAS AQUINAS, 1 THE SUMMA THEOLOGICA 31620 (Fathers of the English Dominican Province trans., 1981).
15

See generally Nicholas Bagley & Richard L. Revesz, Centralized Oversight of the Regulatory State, 106 COLUM. L. REV. 1260 (2006).
16

See, e.g., Heckler v. Chaney, 470 U.S. 821, 831-32 (1985):

The reasons for [the general unsuitability for judicial review of

agency decisions to refuse enforcement] are many. First, an
agency decision not to enforce often involves a complicated balancing of a number of factors which are peculiarly within its expertise. [T]he agency must . . . assess whether a violation has occurred, . . . whether agency resources are best spent on this
violation or another, whether the agency is likely to succeed if it

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Superficially, both positions may appear plausible. Indeed,

both positions have strong expressions in the case law of the U.S. Supreme Court,18 and in the academic literature.19 Several legal standardssuch as standing,20 the interpretation of legislative inaction,21

acts, whether the particular enforcement action requested best fits

the agencys overall policies, and [other factors]. . . .
In addition[,] . . . when an agency refuses to act it generally does
not exercise its coercive power over an individuals liberty or
property rights, and thus does not infringe upon areas that courts
often are called upon to protect. . . .
17
See, e.g., Bagley & Revesz, supra note 15.
18

See, e.g., DeShaney v. Winnebago County Dept. of Soc. Servs., 489

U.S. 189 (1989) (holding in a 6-3 decision that a local social service workers failure to prevent child abuse did not violate the Due Process Clause although the social worker had reason to believe abuse was occurring.); Massachusetts v. EPA,
549 U.S. 497 (2007) (holding in a 5-4 decision that the EPAs denial of a petition
for rule making was arbitrary, capricious, or otherwise not in accordance with
law); Caperton v. A.T. Massey Coal Co., Inc., 556 U.S. 868 (2009) (holding in a
5-4 decision that a judges failure to recuse, when a probability of actual bias exists, may make him subject to disqualification).
19

See, e.g., Lisa Schultz Bressman, Judicial Review of Agency Inaction:

An Arbitrariness Approach, 79 N.Y.U. L. REV. 1657 (2004); William N. Eskridge,
Jr., Interpreting Legislative Inaction, 87 MICH. L. REV. 67 (1988); Judicial; Kahn,
supra note 8; Peter H.A. Lehner, Judicial Review of Administrative Inaction, 83
COLUM. L. REV. 627 (1983); Ronald M. Levin, Understanding Unreviewability in
Administrative Law, 74 MINN. L. REV. 689 (1990); Glen Stazsewski, The Federal
Inaction Commission, 59 EMORY L.J. 369 (2009); David A. Strauss, Due Process,
Government Inaction, and Private Wrongs, 1989 SUP. CT. REV. 53 (1989); Cass R.
Sunstein, Reviewing Agency Inaction After Heckler v. Chaney, 52 U. CHI. L. REV.
653 (1985).
20

See, e.g., Allen v. Wright, 468 U.S. 737 (1984) (denying standing to petitioners who sought to challenge agency inaction, specifically the agencys failure
to adopt standards for denying tax exemptions from racially segregated private
schools); Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992) (denying standing to
petitioners that sought to challenge agency inactionthe Secretary of Interiors refusal to enforce certain requirements of the Endangered Species Act); Massachusetts v. EPA, 549 U.S. 497 (granting standing to petitioners that that sought to challenge agency inaction The EPAs refusal to regulate greenhouse gas emissions).
21

See Eskridge, supra note 19. Justice Scalia articulated the strongest opposition against giving any meaning to legislative inaction. See, e.g., Johnson v.
Transp. Agency, Santa Clara Cnty., Cal., 480 U.S. 616, 672 (1987) (Scalia, J., dissenting) (vindication by congressional inaction is a canard).

48

What Is Government Failure?

and the un-reviewability presumption22 frequently serve as tools

for dismissing critique of inaction.
But the distinction is artificial and analytically flawed. Values
and other preferences often shape views regarding its relevance. For
example, consider action and inaction of individuals. Assume an individual can take an action that would prolong her life, but some individuals do not take such action. Should the state require action? In
Cruzan v. Missouri, Justice Antonin Scalia was willing to
acknowledge that the distinction between action and inaction has
some bearing.23 It would not make much sense, he explained, to
say that one may not kill oneself by walking into the sea, but may sit
on the beach until submerged by the incoming tide; or that one may
not intentionally lock oneself into a cold storage locker, but may refrain from coming indoors when the temperature drops below freezing.24 Justice Scalia, therefore, argued that the distinction between
action and inaction might be utterly irrelevant.25
In National Federation of Independent Business v. Sebelius
(NFIB), the Court considered a similar issue: the validity of the socalled individual mandate, a minimum coverage of health insurance policy. Writing for the Court, Chief Justice John Roberts declared that [t]o an economist, perhaps, there is no difference between activity and inactivity[, but] the distinction between doing
something and doing nothing would not have been lost on the Framers, who were practical statesmen, not metaphysical philoso-

22

The unreviewability presumption supposedly shields agencies inaction

from judicial review. See Heckler v. Chaney, 470 U.S. 821, 832-33 (1985) (holding
that an administrative agencys decision not to take action is presumptively unreviewable; the presumption may be rebutted where the substantive statute has provided guidelines for the agency to follow in exercising its enforcement powers.) In
Massachusetts v. EPA, the Court clarifiedeffectively narrowedthe presumption, distinguishing rulemaking denials from decisions not to enforce and holding
that the former are subject to judicial review. Massachusetts v. EPA, 549 U.S. 497.
23

Cruzan by Cruzan v. Dir., Missouri Dep't of Health, 497 U.S. 261, 296

24

Id.

25

Id. at 296-97.

(1990).

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Vol. 30:44, 2013

phers.26 In NFIB, Justice Scalia agreed with the Chief Justice on this
point.
Moreover, government inaction means, among other things,
accommodation of externalities. The underlying logic of exempting
government inaction from scrutiny is that government actions can
violate the Constitution, but government failures to act against private
wrongdoers cannot.27 Under this premise, for example, environmental regulation violates polluters constitutional rights, while government inaction on environmental issues does not violate the rights of
those affected by pollution. Similarly, gun control measures abridge
Second Amendment rights, but government inaction concerning gun
control does not abridge victims rights. Or, restrictions on tobacco
sales infringe constitutional rights of businesses, whereas inaction on
tobacco does not infringe the public rights.28 And so on.
In sum, the distinction between action and inaction is often a
matter of framing, and cannot be depicted as substantive. When applied to the government, the distinction narrows the governments
fundamental duty to restrain men from injuring one another.29 If
government inaction cannot constitute a failure, than people are free
to harm each other, including by imposing ones costs on society.
III. Imperfection as a Failure
What degree of imperfection defines a government failure?
Thomas Aquinas taught believers that [t]o sin is to fall short of a

26

National Federation of Independent Business v. Sebelius, 132 S.Ct.

2566, 2589 (2012).
27

David A. Strauss, Due Process, Government Inaction, and Private

Wrongs, 1989 SUP. CT. REV. 53, 53 (1989). See also David A. Strauss, Why Was
Lochner Wrong?, 70 U. CHI. L. REV. 373 (2003).
28

See, e.g., Walgreen Co. v. San Francisco, 185 Cal. App. 4th 424 (2010)
(addressing San Franciscos ban on sales of tobacco products in pharmacies).
29

See, e.g., Thomas Jefferson, Inaugural Address, 10 ANNALS OF CONG.

763, 765 (1801) ([A] wise and frugal Government, which shall restrain men from
injuring one another, shall leave them otherwise free to regulate their own pursuits
of industry and improvement, and shall not take from the mouth of labor the bread
it has earned.)

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What Is Government Failure?

perfect action30 and that sinning is . . . a deviation from that rectitude which an act ought to have.31 Today, people understand that the
pursuit of perfection is impractical.32 For example, in corporate law,
fiduciary duties and the business judgment rule emphasize that officers and directors can make mistakes.33 Yet, people sometimes perceive deviations of public policies from ideal norms or theoretical solutions as government failures. Such perceptions, the so-called
nirvana fallacy,34 are common among both critics and advocates of
regulation. In effect, they reflect unrealistic demands for perfection in
the spirit of Thomas Aquinas.35
In this spirit, many critics of regulation focus on ideal norms
of liberty and freedom, and believe that most regulatory measures are
imperfect and fail society; that is, government is the problem.36
Likewise but with different values, many advocates of regulation are
troubled by problemsimperfections in our worldand believe
that society can address such problems with regulations.
The references to the invisible hand and the precautionary
principle as plausible guidelines for public policies illustrate these
perspectives. Invisible hand arguments ordinarily propose that mar-

30

AQUINAS, supra note 14, at 138.

31

Id. at 312.

32

See, e.g., HERBERT A. SIMON, MODELS OF MAN 198 (1957) (The capacity of the human mind for formulating and solving complex problems is very
small compared with the size of the problems whose solution is required for objectively rational behavior in the real world.)
33

See, e.g., In re Caremark International Inc. Derivative Litigation, 698

A.2d 959 (Del. Ch. 1996); In re Citigroup Inc. Shareholder Derivative Litigation,
964 A.2d 106 (Del. Ch. 2009); Stone v. Ritter, 911 A.2d 362 (Del. 2006); In re
Walt Disney Co. Derivative Litigation, 907 A.2d 693 (Del. Ch. 2005); Brehm v.
Eisner, 906 A.2d 27 (Del. 2006).
34

Harold Demsetz, Information and Inefficiency: Another Viewpoint, 12 J.

L. & ECON. 1, 1 (1969) (criticizing the nirvana approach to public policy).
35

See Barak Orbach, What Is Regulation?, 30 YALE J. REG. ONLINE 1, 6

(2012) (defining regulation as state intervention in the private domain, which is
a byproduct of our imperfect reality and human limitations.)
36

President Ronald Reagans Inaugural Address, 127 Cong. Rec. 715, 716

(1981).

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kets are generally efficient and government actions burden and disrupt them.37 The precautionary principle prescribes that activities that
pose certain risks to the environment or human lives should be
banned until safety is established.38 Both concepts offer reliance on
simplistic frameworks that never have proved themselves, or more
precisely, have proved their ineffectiveness.39 Proponents of these
concepts will always identify government failures. Under invisible
hand theories, government regulation is unwarranted intervention in
markets. Under the precautionary principle, the government is unlikely to do enough to prevent all activities that pose risks to lives and the
environment.
37

For discussions of several aspects of the invisible hand thesis see Barak
Orbach, Invisible Lawmaking, 79 U. CHI. L. REV. DIALOGUE 1 (2012); BARAK
ORBACH, REGULATION: WHY AND HOW THE STATE REGULATES 144-55 (2012);
Adrian Vermeule, The Invisible Hand in Legal and Political Theory, 96 VA. L.
REV. 1416 (2010).
38

See, e.g., DOUGLAS A. KYSAR, REGULATING FROM NOWHERE:

ENVIRONMENTAL LAW AND THE SEARCH FOR OBJECTIVITY (2010). San Francisco
supposedly expressly endorsed the Precautionary Principle See San Francisco, Resolution No. 12903 (Mar. 13, 2003); San Francisco Environment Code and Precautionary Principle Policy, Ordinance No. 17103 (July 3, 2003). Similarly, the 1957
Delaney Clause effectively adopted this principle. The Delaney Clause banned all
food additives having the potential of induc[ing] cancer in man or animal. 21
U.S.C. 348(c)(3). See Less v. Reilly, 968 F.2d 985 (9th Cir. 1992).
39

For the invisible hand see, e.g., The Financial Crisis and the Role of
Federal Regulators: Hearing Before the H. Comm. on Govt Oversight and Reform, 110th Cong. 17 (Oct. 23, 2008) (testimony of Alan Greenspan, Former
Chairman of the Federal Reserve) (stating that those of us who have looked to the
self-interest of lending institutions to protect shareholders equity (myself included)
are in a state of shocked disbelief. . . . The whole intellectual edifice . . . collapsed.); Joseph Stiglitz, Regulation and Failure, in NEW PERSPECTIVES ON
REGULATION 11, 17-18 (David Moss & John Cisternino eds., 2009) (the primary
reason for the government failure [that led to the Great Recession] was the belief
that markets do not fail, that unfettered markets would lead to efficient outcomes,
and that government intervention would simply gum up the works.); Henry T.C.
Hu, Efficient Markets and the Law: A Predictable Past and Uncertain Future, 4
ANNU. REV. FIN. ECON. 179 (2012); CARMEN M. REINHART & KENNETH ROGOFF,
THIS TIME IS DIFFERENT: EIGHT CENTURIES OF FINANCIAL FOLLY (2009); STEVEN
G. MEDEMA, THE HESITANT HAND (2009); ROBERT J. SHILLER, IRRATIONAL
EXUBERANCE (2d ed. 2005). For the Precautionary principle see generally CASS R.
SUNSTEIN, LAWS OF FEAR: BEYOND THE PRECAUTIONARY PRINCIPLE (2005); Cass
Sunstein, Irreversibility, 9 LAW PROBABILITY & RISK 227 (2010).

52

What Is Government Failure?

Imperfection is not all about the degree of government conduct; it may also be about the form. Two general forms of imperfections are commonly used to define government failures: a deviation
from adequate cost-benefit analysis and a mismatch between normative expectations and public policies.40
Cost-benefit analysis as a standard for government failures
underscores the inability to define ex ante precise criteria for government failures and potential misuse of hindsight.41 When undesirable outcomes materialize, we can supposedly employ a LearnedHand-like formula (or a more sophisticated analysis) to examine
whether the government adequately invested in precautions to address the risk.42 Such inquiries do not account for budgetary con-

40

See, e.g., Bus. Roundtable v. S.E.C., 647 F.3d 1144, 1148-49 (D.C. Cir. 2011):

[The SEC] acted arbitrarily and capriciously for having failed

once again . . . adequately to assess the economic effects of a new
rule. Here the Commission inconsistently and opportunistically
framed the costs and benefits of the rule; failed adequately to
quantify the certain costs or to explain why those costs could not
be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems
raised by commenters.
Com. v. Wasson, 842 S.W.2d 487, 501 (Ky. 1992):
By 1974 [when Kentucky enacted its anti-sodomy law] there had
already been a sea change in societal values insofar as attaching
criminal penalties to extramarital sex. The question is whether a
society that no longer criminalizes adultery, fornication, or deviate sexual intercourse between heterosexuals, has a rational basis
to single out homosexual acts for different treatment.
41

See, e.g., John F. Morrall III, A Review of the Record, 10(4)

REGULATION 25 (1986); John Morrall III, Saving Lives: A Review of the Record, 27
J. RISK & UNCERTAINTY 221 (2003). For a discussion of the controversy over costbenefit analysis, see ORBACH, REGULATION, supra note 37, at 113-18. For the hindsight bias see Scott A. Hawkins & Reid Hastie, Hindsight: Biased Judgments of
Past Events after the Outcomes Are Known, 107 PSYCH. BULL. 331 (1990); Kim A.
Kamin & Jeffrey J. Rachlinski, Ex-Post Ex Ante, 19 L. & HUMAN BEHAVIOR 89
(1995); Jeffrey J. Rachlinski, A Positive Psychological Theory of Judging in Hindsight, 65 U. CHI. L. REV. 571 (1998).
42

United States v. Carroll Towing Co., 159 F.2d 169 (2d Cir. 1947)
(Hand, J.). See generally Mark Grady, Untaken Precautions, 18 J. L. STUD. 139

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straints, ex ante knowledge of risks, and available precautions. Therefore, such inquiries may be reasonable for certain domains but not for
others.
Mismatches between normative expectations and public policies may also establish perceptions of government failures. Examples
of such perceptions may include the inability of the federal government to address child labor until 1938,43 the endorsement of eugenics
and the maintenance of eugenics programs until 1974,44 and the
choice to ignore irrational exuberance during the housing bubble of
2000s.45 The existence of a mismatch implies that the underlying
normative expectation is not in consensus. For some portion of the
public there is no mismatch.46 But those, whose normative views
(1989); Allan M. Feldman & Jeonghyun Kim, The Hand Rule and United States v.
Carroll Towing Reconsidered, 7 AM. L. & ECON. REV. 523 (2005).
43

The 1938 Fair Labor Standards Act was the first federal legislation that
set limit on child labor that survived scrutiny of the Supreme Court. Hammer v.
Dagenhart, 247 U.S. 251 (1918) (holding that the Keating-Owen Child Labor Act
of 1916 that restricted child labor was unconstitutional); The Child Labor Tax
Case, 259 U.S. 20 (1922) (invalidating a federal tax imposed on goods produced
with child labor); United States v. Darby, 312 v. 100 (1941) (upholding the constitutionality of the Fair Labor Act). For the history of the child labor debate, see
HUGH D. HINDMAN, CHILD LABOR: AN AMERICAN HISTORY (2002); KRISTE
LINDENMEYER, A RIGHT TO CHILDHOOD: THE U.S. CHILDRENS BUREAU AND
CHILD WELFARE, 19121946 (1997).
44

North Carolina, the last state to engage in eugenics, sterilized people

for the best interest of the[ir] mental, moral or physical improvement until 1974.
N.C. Ch. 1281 35-36 (1973). See THE GOVERNORS TASK FORCE TO DETERMINE
THE METHOD OF COMPENSATION FOR VICTIMS OF NORTH CAROLINAS EUGENICS
BOARD: FINAL REPORT (Jan. 2012); Kim Severson, Thousands Sterilized, a State
Weighs Restitution, NY TIMES, Dec. 10, 2011, at A1. See also Buck v. Bell, 274
U.S. 200 (1927) (Holmes, J.) (It is better for all the world, if instead of waiting to
execute degenerate offspring for crime, or to let them starve for their imbecility,
society can prevent those who are manifestly unfit from continuing their kind.).
45

See NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND

ECONOMIC CRISIS IN THE UNITED STATES, THE FINANCIAL CRISIS: INQUIRY REPORT
(final report, Jan. 2011).
46

Lawrence v. Texas stands for the potential normative mismatch that the
majority may have to tolerate. Lawrence v. Texas, 539 U.S. 558, 577 (2003)
([T]he fact that the governing majority in a State has traditionally viewed a particular practice as immoral is not a sufficient reason for upholding a law prohibiting
the practice.).

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What Is Government Failure?

clash with existing public policies, may perceive the contrast as a

government failure. Normative contrasts of this type begin with the
general controversy over regulation: For some a government failure
is a consequence of too much regulation, while for others it is a result
of too little regulation.47
In sum, every government failure represents some imperfection in government performance, but not every imperfection in government performance is a failure. Although we often see government failures, threshold standards that separate tolerable
imperfections from government failures do not exist. In corporate
law, only extreme situations of improper intent, conflict of interest,
carelessness, and inattention or a failure to be informed of all facts
material to a decision may result in liability for decisions made or not
made.48 By contrast, under some theories, the government fails
whenever it acts because of the inevitable imperfections. Such theories are impractical.
IV. Defining Failure
What governments actions and inaction ought be considered
government failures? When bad things happen, such as a natural
disaster hits a major city, a financial bubble bursts, or a Ponzi scheme
unravels, a government failure is often declared.49 The reasoning for
such public verdicts is that the public stewards . . . ignored warnings
and failed to question, understand, and manage evolving risks . . . to

47

See supra Section I; Orbach, What Is Regulation?, supra note 35.

48

See supra note 33.

49

See, e.g., HURRICANE KATRINA LESSONS LEARNED, STAFF, THE

FEDERAL RESPONSE TO HURRICANE KATRINA: LESSONS LEARNED (Feb. 2006);
NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS
IN THE UNITED STATES, THE FINANCIAL CRISIS: INQUIRY REPORT (final report, Jan.
2011) (hereinafter, INQUIRY REPORT); U.S. SENATE PERMANENT SUBCOMMITTEE
ON INVESTIGATION, COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL
AFFAIRS, WALL STREET AND THE FINANCIAL CRISIS: ANATOMY OF A FINANCIAL
COLLAPSE (Apr. 13, 2011); U.S. S.E.C. OFFICE OF INVESTIGATIONS, INVESTIGATION
OF FAILURE OF THE SEC TO UNCOVER BERNARD MADOFFS PONZI SCHEME (Aug.
2009).

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the well-being of the American public.50 Such failures supposedly

refer to substantial imperfections in government performance.
Designed by humans for a complex reality, regulations tend to
be imperfect. Government failures, including a lack of, or inadequate
regulation, merely reflect the imperfect nature of regulation. Indeed,
the phrase government failure as a term of art was born in critique
of regulation.
Government failure as a concept in regulation refers to
substantial imperfection in government performance. Such imperfections are comprised of inadequate actions and unreasonable inactions. The scope of the imperfection is related to the level of a disregarded risk, inadequacy of cost-benefit analysis, deviation from
popular normative expectations, and magnitude of misallocated resources. In essence, government failures are accidents that cannot be
eliminated, but their costs can be reduced.

50

56

INQUIRY REPORT, at xvii.