Which elements of the economy are best left to free markets and which
elements require government intervention? Governments are clearly
necessary to provide law and order and to define and enforce property
rights. But beyond these basic functions—ones that we often take for
granted—what is the case for government intervention in otherwise free
markets?
The general case for some reliance on free markets is that allowing
decentralized decision making is more desirable than having all economic
decisions made by a centralized planning body. The general case for
government intervention is that almost no one wants to let markets
decide everything about our economic affairs. Most people believe that
there are areas in which markets do not function well and in which
government intervention can improve the general social good.
The operative choice is not between an unhampered free-market economy and a fully
centralized command economy. It is rather the choice of which mix of markets and
government intervention best suits people’s hopes and needs.In this chapter, we discuss the role of the government in market-based
economies, identifying why markets sometimes fail and why government
policies sometimes fail. We begin by examining the basic functions of
government.