The second primary function of government, the productive function, involves the provision of activities that are difficult to provide through markets. There is both an indirect and direct component of this productive function. The indirect component involves the creation of an environment for the efficient operation of markets. As noted, a legal structure that protects property rights and enforces contracts enhances gains from trade and market efficiency. Similarly, monetary arrangements that provide residents with access to money with stable purchasing power across time reduces uncertainty and facilitates gains from exchange. The provision of a stable monetary and price environment is one of the most important productive functions of government. As discussed in Part 2: Element 5 within your Common Sense Economics eBook, when governments perform this function well, people will invest more, cooperate more fully through trade, and achieve higher income levels.
Sometimes the productive function of government is more direct. There are some goods for which it is difficult to establish a one-to-one relationship between payment for and receipt of the good. For example, national defense is jointly consumed by the citizenry. It would be virtually impossible to provide some citizens with protection against foreign aggressors without simultaneously providing it to all. Markets will tend to produce too little of goods with such characteristics. As a result, government provision may improve economic conditions. This issue is considered in more detail below (Part 2: Element 3 within the eBook).
In other cases, it may be very costly to monitor usage and collect payments directly from users. When this is the case, it may be inefficient to provide such goods through markets. Roads, particularly those in cities and towns, provide an example. The cost of collecting fees and thereby charging users directly for their use would be exceedingly high. Thus, it is typically more efficient to make most roads available to all and finance them through taxation.
As we have stressed throughout, getting the most value from our resources requires that actions be undertaken only when the benefits exceed the costs. This principle applies to government as well as market activity. Unfortunately, when government action involves projects financed with taxes or through borrowing, both benefits and costs are difficult to measure. In the marketplace, the choices of buyers and sellers reveal information about benefits and costs. Consumers will not purchase goods unless they value them more than their price. Similarly, producers will not continue to supply goods unless they can cover their costs. But the information provided by the choices of consumers and producers is lost when the government undertakes an activity and finances it with taxes. There are no buyers spending their own money and thereby revealing information about their benefits. Moreover, the revenues paid to the suppliers were extracted through compulsory taxation and therefore they provide no assurance that the project is valued more than its cost.
- What services do you think only the government can perform?
- How does customer service compare in a government office (say the Bureau of Motor Vehicles), compared to a store? Why do you think it is different?
- It is clear that there are many services being performed by the government that are either unnecessary, or could be performed better by private industry. Why do you think it is so hard to end such services?
- Are there things you wish were being done by the government, instead of being left to private solutions? If so, why do you think they are not being performed by government?
This reading is an excerpt from Certell’s Common Sense Economics eBook. Certell offers curriculum materials and eBooks free of charge for students and teachers. Click Here to download the Common Sense Economics Materials.
Carlson, S. (n.d.) Government isn’t the solution its the problem [Cartoon]. Retrieved from https://arunwithaview.wordpress.com/2015/02/28/the-proper-size-of-government-is-big/