Government policy has become a standard prescription to correct for unstable, inequitable, or inefficient market outcomes. In addition to maintaining a stable legal environment for economic activity, widely accepted goals for government now include
Ensuring full employment, a stable price level, and a secure and growing standard of living. (Instability is the first category of market failure.)
2. Facilitating equity through redistributions of income. (Potential inequity is a second broad type of market failure.)
3. Promoting market competition and allocating resources to meet public wants efficiently. (The third major type of market failure is potential allocative inefficiency because of excessive market power or because certain goods will not be optimally provided in purely private markets.)
Stability, the first goal, is primarily a macroeconomic topic. Policies intended to achieve equity, the second goal, were addressed in the preceding chapter. Antitrust policies (again, covered in an earlier chapter) promote efficiency through competition. Our focus in this chapter is how government allocates resources to provide for public wants.
Government in the United States now directly allocates roughly one-fifth of our national output in attempts to meet these goals. Another 15% is redistributed through transfer payments, which include such outlays as welfare payments and loans to farmers or students. Figure 1 provides estimates of the size and recent growth of total government activity. These estimates ignore certain costs of government, such as those incurred by firms in complying with government regulations, and the opportunity costs of some resources held by government (e.g., national parks).