If competitive markets arise to cover all desired commodities to be traded, then the need for government is minimal. One such minimal role is to establish and maintain property rights, since the establishment of individual rights to initial endowments and to the gains of trading those endowments is a necessary condition for the efficient use of markets; see e.g. Inman (1987). Some philosophers and economists attach a second role to the government in a perfect market economy: to use taxes and transfers so as to redistribute initial endowments (wealth) across individuals in order to attain a (in some sense) fair distribution.

Where markets fail to achieve efficiency, government intervention may be desirable. The welfare losses from each of the market failures discussed in chapter 5 suggest that an efficient and perfectly informed government has a role to play beyond the one performed by the minimal state. But how do governments and their bureaucrats actually behave? In this chapter we will begin by considering the efficient provision of a pure public good and then introduce government failures that may lead to an inefficient level of government expenditure.

Efficient provision of public goods

From the point of view of the individual consumer there need not be any remarkable difference between a private good and a public good. Both kinds of goods can be thought of as entering his preference function and adding to his welfare. This means that we would expect to find a trade-off between private and public goods. In figure 6.1a we have drawn indifference curves for a household that consumes a single private good (x) and a single public good (z).