Public Spending and the Political Process


The Failure of Government

Government Intervention

In the discussion about public goods, the rationale for public provision is the failure of the market. However, even if the market fails, it does not necessarily mean that the government must provide the goods. For example, if market failure is due to externality, the government may impose a Pigouvian tax and/or subsidy policy to ameliorate the failure. Namely, the government may intervene by using taxes and/or subsidies. The government does not have to provide the public goods; these may be provided by the private sector with appropriate tax and subsidy policies. It is difficult to judge whether the government or the private sector with some indirect intervention should provide impure public goods.

If the market fails, the standard public finance approach suggests that the government should intervene to correct the market failure. Alternatively, we could say that the government should not intervene even if the market fails. This is because government intervention may produce another cost, the failure of government. In this regard, which cost is more serious, the failure of government or that of the market? This raises the fundamental issue of government behavior in the theory of public finance.

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