I have been in a game or two where they had full crime/justice systems. You commit a crime, you are put through "court" (not really), and then guilty and jailed or free to live happy. The game turned into who you knew and who you kissed. The government was a popularity contest and didn't really care about government so much as they were on top to dictate. It was used as a power trip against other players they did not like and in return spawned PvP fights against people in government who would then cower behind the game makers for protection.
With that micro rant being said there are a few other things that would have to be addressed in government being added to the game. Can government made rules violate TOS or single out groups, do they have control over anything that directly affects players, and if something is aplied by these government people what assurance is there that it will apply to all.
When you give players power they use it to thier advantage. This can be very distructive to players if not watched or done correctly. Sorry if I am speaking out of turn and with lack of what real government ideas there are for the game but if they were lie anything I was recently involved in then we could see people that are currently in the top ten richest people become the top ten poorest and that could affect them in RL and could be solely drivin by a jealous player not in government at all.
Again sorry if this is a rant. I just know "governments" in game sound like a good idea but unless watched very closly by the Lindens here it could get out of control very quickly.