Abstract: This paper develops a model which describes the interaction between the strength of institutional environment and the optimal allocation of resources in a context where the State intervenes to correct for market failure. The changes in the strength of the institutional environment is treated using a parameter that accounts for the rent-seeking activity of bureaucrats and the administrative capability of government. The model demonstrates that in a weak institutional environment, bureaucrats’ rent-seeking activity may represent, through adequate State policies, a mechanism which can be used to stimulate the adoption of good production technology, increasing social surplus and to neutralize market failure with less distortions.