No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fourteen: Decision-making in Democracy: Public Choice 334 WHAT SHOULD GOVERNMENT DO? We’ve already highlighted the fact that the government has either direct or indirect control of almost 50% of the economy, and we’ve suggested that the complex provision of public goods and services leads to a separation of the supplier from the demander— which could lead to inefficient allocation of resources. So what should the government do? What role is appropriate in the economy? One thing that almost everyone agrees on (with the exception of extreme anarchists) is that government has a duty to protect its citizens. In biblical terms, the government is God’s avenger of evil and the bearer of the sword (Romans 13:1-5 ). So the government protects us from evil through the police and military. Economists see this role as necessarily including the making of laws, enforcing contracts, and restraining predations of one citizen on another. With protection of private property rights, citizens will be free to engage in mutually beneficial exchange, confident that the product of the sweat of their brow will be preserved from aggressors. In chapter 13, we reviewed products that suffer from market “failure,” which suggests the possibility that the government may be able to provide that good or service more efficiently than the private sector, or the provision of that good or service may benefit from government regulation. Public goods and externalities require at least a consideration of whether market outcomes could be improved by government provision or regulation. The primary problem of government provision of goods is designing the right incentive structure to ensure efficient production of the good or service. We previously demonstrated that markets have a powerful incentive to produce only those items which consumers value more than the cost of the resources used to produce the good. Those that produce efficiently, therefore, are rewarded with profit, while those that do not, suffer losses. In the provision of public goods, how does the government know what goods to produce and how much they should produce? It’s useful to review our previous definition of efficiency we used in our discussion of markets, as seen in Figure 14.2 . When consumers value a good or service more highly than the cost of resource inputs (such as the labor and raw materials used to produce a product), producers have the profit incentive to provide a good or service. Conversely, if consumers do not value the goods as much as it costs a producer to make the product, the producer will not produce the item (or he will be punished with losses). In the provision of government services, bureaucrats usually do not have Figure 14.2, Market Equilibrium is Efficient. Markets tend to lead to efficient results because every item that is valued by consumers (as represented by the marginal benefit inherent in the demand curve) greater than the cost of the inputs used to produce the item (represented by the supply curve) are produced and value is created in exchange. Likewise, producers that provide a product that costs more to produce than people value it will suffer loss. P ($) Q (#) Q * P * S D