Your post ignores the existence of democracies. Governments fail all the time. In a democracy failures of government will often yield a total collapse and complete replacement. If a failure is spectacular enough, these failure often come with constitutional reforms or even revolutions.

In addition, democratic governments (and even many autocratic governments) have some levels of distribution of power. Your small municipal government may very well end up being absorbed into you neighboring municipality because it is more efficient. Maybe an intermediate judicial step is introduced at a county, or even country level.

Governments do try, and often succeed into making your freedom and your interaction with society at large as efficient as possible, while trying to maximize your happiness. (Although I’ll admit way to often democratic governments do act in a way that maximized the profits of the wealthy class more then your happiness).