2.6 Methods of Government Intervention

As mentioned before, monetary and fiscal policy are the broad categories of how governments can intervene in the economy. Governments also play a significant role in the provision and production of goods and services, particularly through infrastructure investments that require funding from taxes. These projects are essential for public welfare but often necessitate substantial financial resources, leading to the collection of taxes to support government initiatives. Government influence extends to private production as well. This influence is exerted through regulation, as well as through subsidization or taxation of private production to guide economic behavior. Additionally, governments purchase goods and services from the private sector, further impacting the market.

We are going to differentiate between provision and production of goods and services. Provision refers to the responsibility of ensuring that a service is available to the public, often involving funding or regulation by the government. Production refers to the actual creation or delivery of that service, which can be done by either the government itself or by private entities.

The production and provision of goods and services is undertaken by three main sectors: private, public, and nonprofit. A central question arises regarding who will provide certain goods and services, particularly those whose societal benefits exceed the costs of production but might not be provided by the market. This leads to considerations about whether these goods and services should be produced by the public or private sector.

Public provision and public production are seen in entities such as local school districts, state police departments, the Federal Emergency Management Administration (FEMA), and the Bureau of Motor Vehicles. These services are funded and operated by government agencies to meet public needs. In some cases, there is private provision but public production. For example, private entities may provide services like police control at rock concerts, commercial satellites launched by NASA, and fee-based services at state parks. Here, private organizations offer the service, but the government handles the production aspect. Conversely, there is public provision but private production, such as with private prisons, charter and voucher schools, private military contractors, and most weapon systems. In these scenarios, the government funds or mandates the service, but private companies are responsible for production. Finally, there is private provision and private production, exemplified by private schools and the Indiana Toll Road. In these cases, both the provision and production of goods and services are handled entirely by the private sector, often driven by market demand rather than public funding or government mandates. Examples in this category are Indiana toll roads.

An important question relates to the economic effects of government intervention. Economic theory shows that efficiency can be (re-)established after correcting market failures. An example would be a Pigouvian tax for a negative externality or a price ceiling for a monopoly. There is also the question of equity versus efficiency, i.e., protection of certain groups may outweigh efficiency from a political perspective. Of course, there is always the issue of interaction between policies. For example, there is a federal subsidy on electric vehicles but state registration fees on electric vehicles.