A market failure and government failure are both about inefficiency. In the financial markets, an inefficiency is recognized when there is not someone else experiencing the other side of a trade. For instance, when someone benefits or profits from a financial transaction, someone else should lose, otherwise the market has failed. A government fails when it too creates inefficiencies, typically by intervening in the markets in a futile attempt to make markets more efficient. When a government steps in financially to rescue a corporation, it might be expected to similarly intervene when other similar businesses are under duress.
In the economy, there are some institutions and industries that are considered just too large and too important to the capital markets and the jobs market to fail. When it appears that a large institution or an entire industry is going under, the government might step in to prevent a colossal failure. The government can do this by extending a bailout or stimulus package that will keep the corporation or industry afloat.
It is possible that the money used in a market bailout is taxpayer money. Also, a bailout that a government extends may be a loan that must be repaid over a predetermined period of years. A market failure and government failure could arise if the lifeboat that is offered does not accomplish what it was designed to do.
If a government uses federal money to rescue the markets and the bailout proves unsuccessful, for instance, if the funding was meant to prevent large corporations from declaring bankruptcy and those companies become insolvent anyway, there has been a market failure and a government failure. It is possible that a government responds too quickly to a precarious market situation. If the government intervenes prematurely rather than letting the markets stabilize, the result could once again be a market failure and government failure.
Economists argue that a government failure has more dire results than a market failure. Given that taxpayer money is often used to finance a market rescue, if citizens do not condone a decision to bail out a corporation or an industry, support for a regional government may wane. It may be especially difficult for the public to support a rescue if the executives within a failing corporation have been earning excessive salaries and bonuses. When politicians decide to intervene in the markets, the reasons should be clearly justified and reasonable to prevent a market failure and a government failure.
