16.5 Government Intervention

Since markets sometimes do fail, and since even efficient markets produce
some undesirable outcomes, there is scope for governments to intervene
in beneficial ways. Whether government intervention is warranted in any
particular case depends both on the magnitude of the benefits that the
intervention is designed to produce and on the costs of the government
action itself. For many types of government activity, cost-benefit analysis
can be helpful in considering the general question of when and to what
extent governments can successfully intervene.

The idea behind cost-benefit analysis is simple: Add up the total costs
associated with a given policy, then add up the benefits, and implement
the policy only if the benefits outweigh the costs. In practice, however,
cost-benefit analysis is usually quite difficult for three reasons. First, it
may be difficult to ascertain what will happen when an action is
undertaken. Second, many government actions involve costs and benefits
that will occur only in the distant future; thus, they will be more
complicated to assess. Third, some benefits and costs are difficult to
quantify; for example, the benefits of intervention to protect an
endangered animal species. Indeed, some people argue that they cannot
be and should not be quantified, as they involve values that are not
commensurate with money. The practice then is to use cost-benefit
analysis to measure the things that can be measured and to be sure that
the things that cannot be measured are not ignored when collective

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