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True - an efficient government is a dangerous one. And regulatory capture seems to be the history of regulation doesn't it? Going back to 1887, the ICC was intended to regulate railroads, yet the only ones who knew enough about the railroad industry were members of that industry -- so they became the regulators.
We should try to stop regulatory capture, but it's a difficult job. Also, regulation tends to make the most sense when it is over activities that produce externalities - like pollution. Even though these can be framed as a property rights problem, the practicable course of action is to implement regulations that provide cost-effective solutions to problems and allow for flexibility - not in meeting goals but in how to meet goals.
Even if I think government should do something, I never trust that it will do it right.
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