There are several forces operating that make government institutions less effective than they might otherwise be.
One is that governments are bigger, and the bigger an institution, the more administrative friction (in large part due to the free rider problem). Of course, this is not unique to government; if you've ever been at a large university or corporation, you've seen this operate as well.
A second problem is that as society becomes more complex, the services that agencies provide become more specialized, and less comprehensible to most citizens; in the old days when specialized information was mostly the province of the professional class, this was pithily summarized as "All professions are conspiracies against the laity.". This problem is particularly bad for services that are used infrequently and/or by a small number of people and/or that are unglamorous. Consequently there is no feedback from past users who have had bad experiences to future users making decisions. (Family law courts, for example, score at least two out of three in that list.) This feedback loop damages markets and cripples competition, which sometimes helps the laity, cutting out middlemen and de-mystifying opaque language to benefit consumers, not without resistance from established interests of course.
A third problem, unique to government, is that of guaranteed lack of competition. The free rider problem becomes more severe because the free riders know that even if the building they work in is physically destroyed or a customer is harmed, it doesn't matter - you still have to go to the DMV (or wherever) somewhere, sometime, and they'll still have a job. Of course, there is always competition on some level, and there is here too, in the sense that if a government functions so badly that it collapses due to civil strife, invasion by foreign powers, starvation or insolvency, then the agency employees stop getting money. This is an unpleasant competition mechanism, although it was the de facto way that (for example) Rome got new Emperors, in the absence of succession rules. Recognizing this unpleasantness, the founders of the U.S. put in a provision for a peaceful transfer of power which does in fact cost some government employees their jobs - but not the vast majority. So if you hate your local DMV enough, you can vote for a governor from another party, and you'll get a new secretary of transportation, but very likely the mean lady at desk 18 will still be there.
One possible solution to this problem would be a more extensive application of the ideal of overlapping status hierarchies. Humans react badly to loss of status, but as long as we're all moving in multiple spheres (family, work, church, your golf buddies, your cooking class) damage to status in any one realm is mitigated in terms of damage to your overall status. The problem to solve here is that ultimately, all animals including us need control of a specific physical territory, and where you appear in one of those territories (and the cultural allegiances that you invariably develop) are involuntary. It would be nice to say, "You know what, I live in San Diego, but California's DMV sucks, so I'm going to go to the one from Missouri. And our environmental laws suck too so I'm going to have open bonfires in my yard with my friends, as is permitted in Mauritius, which is the law I'm choosing to follow." But you still live in San Diego and have no choice but to cooperate with your physical neighbors, who probably don't want the smoke and wildfire risk. San Diego burns down, not Mauritius. Interestingly, to some degree we do in fact allow these arrangements with incorporation and litigation law, and it's probably no surprise that non-physical-geographical solutions have emerged in business, that is, in purely voluntary associations of cooperating individuals with much lower average costs of "emigrating" (quitting or selling out your share). I submit that a solution allowing these arrangements to apply to all government policy would be the greatest political innovation since modern democracy. It would improve government profoundly. Right now the quality of government appears to rest on the cultural values of the country the government is running and how well-suited they are to being a modern nation-state. If you're Finland or Korea, that's good news. If you're Sudan, not so much.
Emigration is arguably another way in which governments do face competition, but there are considerable barriers that decrease the effectiveness of freedom of movement, namely that there is invariably a large cost to emigration - the DMV would have to be pretty bad before you moved to Missouri or New Zealand - which leads to Coasian non-global optima in the quality of policy and services. This is discussed in the previous post in the context of charter cities. Charter cities are arguably another solution to this problem. The idea is to apply putatively more effective laws from another polity in a small enough chunk of territory that people in surrounding polities would have a realistic choice of where to work and do business (the model being Hong Kong of course).
A final problem regarding the brute fact that governments are based on the physical control of territory, and here Chairman Mao deserves a point for honesty: these organizations (governments) maintain their monopoly over territory with force, period. Again this is a forced move, since by basing organizations on physical territory and emotional allegiances that can't be opted out of, there are members of the group who are non-voluntary or who are irrational, and who you can't "fire". Hence armies and police. It is likely that the violence institutions will be used to preserve the status quo, so I fully expect that if Thiel et al's seasteading initiative is realized, it will be a few years at most before the nearby country finds an excuse to attack them, likely for trade in something considered contraband in the attacking country (drugs, weapons, gambling, prostitution) and likely in as morally inflammatory a way possible, to engineer sympathies against the seastead. (I'm picturing military units storming the structure and the President at the time reading a statement about child prostitution, or funneling drugs to America's children.) I'm not familiar with the details of the current proposal but I hope they have taken this into account.
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