Answer to Question #5465 in Macroeconomics for Farah
market economy. Further, any decision to regulate or intervene in the play of
market forces must carefully balance the costs of such regulation against the
benefits that such intervention will bring.
National defense is one example where the role of government is indispensable. This and other public goods government
provide because no private business could sell public goods to the citizens of a
nation and stay in business.
To the extent that any product does generate significant external or spillover benefits, governments may consider subsidizing or
otherwise encouraging its consumption, production, or both, so that the value of
the external benefits are included in the market price and output level of these
products. Just as external or spillover costs lead to overproduction of certain
goods, the existence of external benefits will lead to underproduction of other
products and services. Public education is perhaps the largest and most significant example of government expenditures and support for a service
regarded as having significant external benefits.
Governments in market economies inevitably engage in programs that redistribute income, and they often
do so with the explicit intention of making tax policies and the after-tax
distribution of income more fair.
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