2.11 Government Intervention (State Provision)

Question 1

What are the advantages of state provision/funding?

Answer 1

• Increases social welfare when markets are missing (eg. by providing public goods)
• Can overcome market failure associated with merit goods and positive externalities to increase social welfare
• May provide large scale infrastructure projects that without state funding of provision would not be prided by private companies because of the very high upfront costs (too risky and do not earn an income quickly enough)
• Reduces significant inequalities in access to education and health due to inequalities in income and wealth -> could lead to “fairer access”
• Can redistribute, because those with higher income and wealth should contribute more as a proportion of income in taxes

Question 2

What are disadvantages of state provision/funding?

Answer 2

• The cost of state provision may be expensive and impose an opportunity cost in terms of other government spending and/or higher taxes
• May be a lack of market incentives (profit motive) which may reduce efficiency of producers
• Moral hazard
• Lack of market “signals” without the price mechanism may mean the government has inadequate information on consumers’ preferences
• There may be a reduction in individual choice/freedom, as the state may determine what, how and for whom
• State provision may create excess demand since supply may be fixed nd since the price mechanism is not be used to ration, an alternative method of rationing may have to be found

Question 3

What are evaluative opportunities for state provision/funding?

Answer 3

• The extent to which a perceived market failure exists
• The government’s view on the socially desirable level of output of relevant goods/services
• The quality of the information the government has to base decisions on
• The extent to which the government feels it can raise the tax revenue required to be able to publicly finance/fund the provision of goods and services
• The government’s assessment of the relative efficiency of the public and private sector in producing the products