Economics and Government Policy
The design and effectiveness of government policy matters for each of our
four key economic problems. When asking what combination of goods
and services is produced in the economy, and whether some
combinations might be better than others, government policy enters the
discussion. In later chapters we will examine situations called market
failures, which arise when free markets lead to too much of some goods
being produced (like pollution) and too little of others (like national
parks). Government policy could be used to alter the allocation of the
economy’s resources to correct these market failures.
When asking who gets to consume the economy’s output, it is natural to
discuss the fairness regarding the distribution of consumption across
individuals. Do free markets lead to fair outcomes? Can we even decide
objectively what is fair and what is unfair? We will see throughout this
book that many government policies are designed with fairness in mind.
We will also encounter an ongoing debate about how much the
government should try to improve the fairness of market outcomes. Some
argue that it is reasonable to do so; others argue that attempts to improve
fairness often lead to reductions in market efficiency that impose large
costs on society.
Government policy is also part of the discussion of why a nation’s
resources are sometimes idle and what can be done to reduce such