One of the books I have been reading this summer is Peter Schuck's Why Government Fails So Often? (Princeton, 2014). So far, it is excellent. Here is David Henderson's reaction to his work, which I basically share.
My own view of how to approach this question takes its cue from Ronald Coase's 1959 paper on the FCC published in the Journal of Law and Economics. As Coase walks through his argument, he states clearly on p. 18 the following:
This "novel theory" (novel with Adam Smith) is, of course, that the allocation of resources should be determined by the forces of the market rather than a result of government decisions. Quite apart from the misallocations which are the result of political pressures, an administrative agency which attempts to perform this function normally carried out by the pricing mechanism operates under two handicaps. First of all, it lacks the precise monetary measure of benefit and cost provides by the market. Second, it cannot, by the nature of things, be in possession of all the relevant information possessed by the managers of every business which uses or might use radio frequencies, to say nothing of the preferences of consumers for the various goods and services in the production of which radio frequencies could be used.
In this short passage, Coase highlights the incentive problems that government faces in making decisions about resource utilization, the problems of bureaucracy and interest groups, the problem of monetary calculation (or the absence thereof), and the discovery and use of dispersed information/knowledge in the economic system. And, of course, he is right to link the identification of these problems with governmental decision making back to Adam Smith. Economists have known about these problems for a long time -- though of course in the course of the history of economic thought different individuals have given particularly crisp explanations of the respective problems -- most notably the work of Mises-Hayek and Buchanan-Tullock. But Coase gets this right, and from what I have read so far of Peter Schuck's book -- so does he.