This is my mistake ridden transcript from 17:27 - 20:03 of a David Friedman talk given at PorcFest 2013. The whole video has been posted here before [1][2], but I was reviewing some notes I had taken and wanted to highlight this part concerning market failure and public goods.

You can easily enough have a public good that is worth more than it costs to produce and it doesn’t get produced. And that’s one of the standard arguments that everyone but anarchists uses for why you need government and it’s a correct argument, it's just that government isn’t the solution because if you think it through you see that the mechanisms that are supposed to make government behave themselves are shot through with public good problems. That for example if you make yourself a well educated voter in order to vote for politicians who pass good laws you have just spent a lot of time and energy producing a public good shared with everybody else in the United States. That’s a public good with a public of 300 million people. It’s not going to get produced and that is why voters are rationally ignorant.

If you run through the way political mechanisms work, the problem economists call market failure; which is a situation where individual rationality doesn’t produce group rationality, such as public goods not getting produced occurs because individuals are not bearing the the costs of the actions they take or getting the benefits. That’s a exception in the private market and the normal situation in the public market. If you think about how political institutions work it is very rarely the case that a political actor either receives the benefits of correct decisions or pays the costs of wrong decisions.

I guess my favorite example of this is actually in the judicial system; there is a particular court decision, I could discuss if people are curious in the question part, in which a federal appeals court made a decision which hinged on a mathematical mistake that a smart high school student should have been ashamed of. And that decision almost certainly killed some thousands of people. It had to do with liability for vaccines, for the live polio vaccine. It held a company liable under circumstances which under the court's own argument should not have been liable. It was a mistake by about factor of 40 in comparing costs and benefits, the result was for a couple of years to slow the development of vaccines and that surely killed some thousands of people. The judges who made that decision never owed a penny to anybody. For what was clearly - I think - culpable negligence in their decision. So what’s wrong with the standard argument that says that market failure is a reason for government is not that the free market works perfectly but only that the alternative works worse. That we don’t have a good way to make governments act in our interest, unfortunately.

Davis v. Wyeth Laboratories, Inc., 399 F.2d 121 (9th Cir.(Idaho) Jan 22, 1968)

Can Judges be Criminally Negligent? - David Friedman