Government Failure and the Tragedy of the Commons
One of the worst problems with the market system, and one often readily acknowledged by even the most radical supporter of the free market, is that of the tragedy of the commons — a tragedy engendering the free rider problem.
Essentially, the tragedy of the commons occurs whenever every individual would be better off if they co-operated, than if they all competed, but because the incentive to co-operate is too small, most (if not all) individuals choose to compete rather than pool their resources.
A classic example is national defence. I would be better off if I, and everyone else in my country, paid for the upkeep of a standing army to deter an invading country.
However, the loss of quality in the country's defences is minimal if I choose not to pay, while everyone else continues paying. Because I am focused only on my own benefit, I choose not to pay, and get a "free ride" on everyone else. More people do the same, and eventually, the standing army collapses.
Recently, I had an example presented to me as a possible tragedy of the commons. This was based on a real life incident in a particular nanny state.
Essentially, there was this piece of public land with a beautiful lake standing next to a hospital. The government decided it would be better if the hospital maintained the lake, and urged the hospital to do so. After all, having a beautiful lake nearby can do nothing but help the hospital.
However, the hospital demurred. Its reasoning was that the nanny state would panic if the lake were not kept properly, and take its own remedial action.
This, though, is not an instance of the tragedy of the commons. It is an instance of the tragedy of the overprotective government.
In the economy, each individual and entity is responsible for their own benefit. If the government decides it is better off with the lake being maintained, it is the government's responsibility to do this, since the lake is public property.
It can hardly foist this responsibility off on the hospital — there is no market failure in this case. The hospital has weighed the costs and benefits of keeping the lake clean and tidy, and decided that it is not worth it.
Of course, society as a collective is better off with the clean lake. But the classic solution to the tragedy of the commons is not to impose a burden on one party alone (in this case the hospital), but to spread the burden across society through taxing those who will benefit, and using these taxes to maintain that common benefit.
Market failure is an endemic problem. But government failure is just as prevalent, and governments which fail to understand where the market goes right and the market goes wrong will themselves end up in the wrong.