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The democratic institutions manipulate the people's will according to their interests. Politicians serve special interest groups or lobbyists to gather the funds for elections. They make irrational economic decisions to influence people so that they are again elected as representatives. Therefore, economic resources are used in a way to attract support for elections. This leads to economic inefficiency.

Suppose the market is left to the people with no interference by the government. In that case, two types of markets can occur, a perfect market (Maximum total surplus with allocative and productive efficiency) and an imperfect market (concentration of market power).

A perfect market is rarely seen in reality. Thus, the possibility of market failures occurs. This includes the following:

• The concentration of market power: It results in higher prices and lower quantities. It creates a possibility of price discrimination.

• Asymmetric information: This leads to a selection of bad goods and services due to imperfect information.

• Externalities: It can also result in inefficiencies like underproduction or overproduction of goods in case of positive or negative externalities, respectively.

• Public goods: The free-rider problem prevents the private sector from producing these goods. These goods may not be produced at all if left to the will of the people.

Thus, decision-making by people (free market) does not guarantee allocative and productive efficiency in the market.

The free market is not a guaranteed solution to achieve economic efficiency. Democratic institutions have their own issues, but they ensure that the market is not left unregulated and those market failures are corrected.

They ensure that public goods are produced (through taxation), externalities are corrected (using the means of direct controls, subsidies, and taxes), asymmetric information is solved (through regulatory and policy actions), and concentration of power in few hands is checked (like Anti-trust laws).