Liberalization failure is a term I use to suggest that efforts to reduce government intervention could actually increase government intervention. The concept tree goes something like this.

Market Failure: When the market does not achieve efficiency because of some problem. We often think of these as being do to externalities, asymmetrical information or market power.

Government Failure: When attempts to correct market failure suffer from rent seeking, rational irrationality or other deviations from the solutions economists theorize. These deviation could wind up making the actual result of government intervention worse than the original externality.

Liberalization Failure: When attempts to leave a market to its own devices results in a social backlash and the adoption of policies worse than what would have prevailed had the government taken the economists’ orginal recommendation.

 

Imagine the following scenario which might very well play out in climate change politics.

The market fails to price carbon, creating a market failure and an excess of carbon in the atmosphere. Economists recommend creating a market for carbon.

Government attempts to create a market for carbon but the process is so riddled with back room deals, special provisions, and permit handouts that it would do little to reduce carbon and would produce significant distortions. This is government failure.

Aware of this problem economists convince the government to decline to act on carbon. The public outraged by the lack of action, however, demands the adoption of stringent anti-carbon regulations and renewable portfolio standards that are far more costly than would have been the poorly implemented carbon market. This is liberalization failure.

 

I am not aware of whether or not there is already a literature on liberalization failure and if so what it is called. Though per Tyler Cowen I should assume that there is.

Nonetheless, I think its another level of unintended consequences that’s worth considering.

Now I am fully aware that the process of creating ever more levels of failure puts us on the Nihilistic Escalator, whereby we wind up concluding that no effort to improve outcomes can succeed.

I’ll try to do a post that issue later.

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