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Indeed, government isn’t just valuable because of its ability to set rules and regulations for the private sector; in some cases, the private sector isn’t capable of adequately providing certain important goods and services at all – and in those cases, having a government that can directly provide those goods and services itself is vital. As Stiglitz puts it:

[It’s often] simply assumed that markets arise quickly to meet every need, when in fact, many government activities arise because markets have failed to provide essential services.

To be sure, the market is an extraordinary mechanism for supplying ordinary consumer goods like electronics, groceries, haircuts, and so on. But there are some goods which, for a variety of economic reasons (including the kinds of collective action problems we’ve been discussing), can only really be provided by government if they’re to be provided at all. As Paul Krugman writes:

Like all advanced nations, America mainly relies on private markets and private initiatives to provide its citizens with the things they want and need, and hardly anyone in our political discourse would propose changing that. The days when it sounded like a good idea to have the government directly run large parts of the economy are long past.

Yet we also know that some things more or less must be done by government. Every economics textbooks talks about “public goods” like national defense and air traffic control that can’t be made available to anyone without being made available to everyone, and which profit-seeking firms, therefore, have no incentive to provide.

And Taylor elaborates:

Do you drive on a highway to get to work? If your home catches fire, do you expect someone to answer when you dial 911? You might not think of roads and fire departments as goods, but economists do. There are some goods that many of us rely on every day, but it is difficult to imagine buying the quantities we desire from a group of private firms competing in the market. Some classic examples are national defense, funding basic research and development, roads and highways, and police and fire protection. These fall into the category of what economists call “public goods.”

Public goods share two key characteristics: they are nonrivalrous and nonexcludable. “Nonrivalrous” means that the good itself is not diminished as more people use it. When you have a private good, such as a slice of pizza, if Max eats the pizza, Michelle can’t. Compare that to, say, national defense. Max being protected by the armed forces doesn’t diminish the amount of protection Michelle receives. “Nonexcludable” means a seller cannot exclude those who did not pay from using the good. That slice of pizza is excludable; you don’t buy it, you don’t get to eat it. But if someone doesn’t wish to be protected by the armed forces, there’s no realistic way to exclude them.

It’s important to remember that this term “public good” has a very specific meaning to economists. It does not refer to everything that is both provided by government and (arguably) good. It’s also important to recognize that categorizing something as not a public good does not mean that there is no economic argument for public policy in that area. Many of the things we call public goods aren’t perfectly nonrivalrous or perfectly nonexcludable, but they are close enough to make it difficult for a private market to provide them. For example:

• Public health measures, such as vaccinations, are nonrivalrous because a rise in population doesn’t diminish the benefit of reducing infectious disease, and they are nonexcludable because the benefit extends to the whole population.
• A good road system offers society all sorts of benefits. Barring toll roads, it’s hard to exclude people from using it. Barring extremes of traffic congestion, my use of a highway doesn’t stop you from using it, too.
• Scientific research—in fact, ideas in general—are nonrivalrous. As Thomas Jefferson (1813) put it, “He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.”
• Many of the benefits of education aren’t just to the person who is educated; there are benefits to all of us from living in a society in which the overwhelming majority of adults can read and understand basic mathematical calculations.

When some people receive the benefits from public goods without paying their fair share of the costs, economists call it a free-rider problem. Imagine the difficulties that could arise if you told people you wanted them to pay for their roads the same way they pay for their groceries. People know that, in the industrialized world at least, odds are the road will be built whether they agree to pay for it or not, and that the government can’t or won’t stop them from using the road once it’s built. Guided by self-interest, most people would prefer that everyone else living nearby chip in for road construction, but that they themselves take a free ride. Since roads are mostly nonexcludable and nonrivalrous (with the exception of toll roads and congested roads), people may decide to be free riders. But if everyone makes this self-interested decision, no road gets built and no one benefits.

The free-rider problem is important to economic analysis. For the most part, economics argues that producers and consumers following their own self-interest offer many benefits for society. But in a situation of public goods, if everyone follows individual narrow self-interest, the result is actually worse for everyone.

How can public goods be provided if a self-interested market works against them? A variety of social mechanisms can help solve the problem. For example, how do public radio and public television survive? They typically use a combination of social pressure (pledge drives, mass mailings) and incentives (thank-you gifts for your pledge, member benefits and events, special programming) to persuade you to contribute. They’re trying to overcome the free-rider problem with a mixture of public recognition for contributors and mild shaming for those who don’t contribute.

The government uses taxes to require citizens to pay for a public good—whether each individual citizen would want that quantity of that good or not. This applies to goods the government provides directly (such as a standing army or a court system) or indirectly, via private contractors (as with road and building construction). When we say that government supplies a public good, we’re actually saying that the government collects the money to pay for the good; it’s an open question whether public workers or the private sector provides the good.

Taxes overcome the free-rider problem by force: if you don’t pay your taxes for the public good, you go to jail. These benefits and costs are part of an implicit social contract. If members of society don’t find a way to come together to provide public goods—through either political or social mechanisms—they all lose out.

We already discussed earlier how the collection of taxes can be justifiable; in the case of taxes like Georgist land value taxes and Pigovian externality taxes, in particular, it’s a straightforward matter of reimbursing people for costs that have been nonconsensually imposed on them by other private-sector actors. But one thing we didn’t really discuss was how to take the next step after those taxes are collected – i.e. how to redistribute them to the population, and whether that redistribution should take the form of direct cash transfers or some other form. A natural first thought might be that if these taxes are supposed to be reimbursing people for the costs they’ve nonconsensually incurred, it would only make sense to have them take the form of simple cash compensation – and in some cases, this may in fact be the right choice. But given everything we know about how public goods work, and how much more efficient it is to provide them via government than via the private sector, it’s not hard to see how a better general approach might be to have the government use at least some of the tax revenue it collects to provide essential public goods, rather than just handing the cash over to the population and leaving it to each individual citizen to find a way of obtaining them privately (which, of course, would result in those citizens either having to pay significantly more for them or not being able to obtain them at all).

This is an uncontroversial point among economists, including strongly pro-market ones. In fact, aside from true dyed-in-the-wool anarchists, even most anti-statists (i.e. those of a more run-of-the-mill libertarian bent) will grudgingly concede that government spending on some public goods like national defense may be justifiable. Still, these anti-statists will often nevertheless insist that government spending on other public goods can’t be considered legitimate in the same way – that allowing the government to spend tax revenues on anything other than physical and legal protection for citizens and property (and maybe one or two other things) is an unacceptable violation of taxpayers’ rights. As Heath points out, though, this stance can’t really be justified on any kind of solid theoretical basis, since the economics are fundamentally the same in either case:

Taxes, as we all know, are coercive. They restrict individual liberty. Yet the libertarian is forced to admit that taxation—at least at a certain level—is not only necessary, but desirable (in order to institute the foundations of the free market). How is one to justify overriding the freedom of the individual in this case? Coercion is justified here because it is necessary in order to resolve a collective action problem. Thus it is not freedom in general that is being denied by such taxes, only the freedom to free ride, which is not really a desirable form of freedom in the first place.

It should be noted that the level of taxation required to institute even the most bare-bones system of property rights and commercial exchange is not negligible. Anyone who has ever bought a piece of land and has been through the rigmarole of title searches and so forth knows that meticulous public records are essential for determining who owns what. Indeed, one of the reasons that “possession is nine-tenths of the law” is that it is prohibitively expensive to keep definitive records of who actually owns what. In their book The Cost of Rights: Why Liberty Depends on Taxes, Stephen Holmes and Cass Sunstein estimate that in 1997 the United States federal government spent $203 million on property-records management. That was just to keep track of things. Protecting and enforcing those rights cost the federal government more than $6.5 billion—and that does not include any of the costs associated with the federal justice system (more than $5 billion), much less “police protection and criminal corrections” in the nation as a whole ($73 billion in 1992).

We have a special term for these types of services when they are offered by government and paid for through taxation. They are called social programs. (They are also known as public goods, although this is a somewhat loose way of speaking.) […] Here we can see the fundamental problem with the libertarian or conservative vision of a minimal state. It has no principled basis: it is simply a list of social programs that people with certain personal preferences and animosities happen to favor. Once the libertarian makes the crucial concession—that it is legitimate for the state to impose taxes in order to provide goods and services that, because of collective action problems, would not otherwise be provided—it’s difficult to explain why there shouldn’t be other social programs as well, to resolve other sorts of collective action problems.

Conservatives, we are told, support government spending on “law and order,” national defense, maybe highways, and perhaps a few other things. But why just these programs? Why not public housing, public education, public health care, state pension plans, unemployment insurance, environmental legislation, and so on? The basic argument for all of these social programs is that state provision is necessary in order to resolve collective action problems. They are, in this respect, no different than the military or the criminal justice system. Of course, the details of these arguments are all controversial. The point is that the libertarian is now forced to consider arguments for each of these social programs on a case-by-case basis. Sweeping denunciations of government “interference” with the market or with individual liberty are no longer credible. The scope of state action and the appropriate level of taxation cannot be settled at the level of political ideology; they now depend upon the answer to empirical questions concerning the occurrence and severity of collective action problems and the effectiveness of government in resolving them.

In response to this, critics of government will often retort that although they admittedly might not have a good basis for categorically rejecting all government spending, they’re still justified in wanting to reject as much of it as possible, due to its inherent wastefulness. They’ll criticize government programs that they perceive as unacceptably inefficient, arguing that no private sector firm that failed to make a profit would ever survive, so therefore no government program that runs at a loss should be allowed to survive either. And to be fair, they’re right to point out that there certainly are some government programs that are unacceptably wasteful and ought to be eliminated. But saying that programs should be eliminated just because they’re unprofitable is a mistake – because after all, in many cases, the whole reason they’re being done by government in the first place, and not by the private sector, is precisely because they wouldn’t be workable as for-profit ventures. As Alexander writes:

In cases where state-run corporations are unprofitable, this is often not due to some negative effect of being state-run, but because the corporation was put under state control precisely because it was something so unprofitable no private company would touch it, but still important enough that it had to be done. For example, the US Post Office has a legal mandate to ship affordable mail in a timely fashion to every single god-forsaken town in the United States; obviously it will be out-competed by a private company that can focus on the easiest and most profitable routes, but this does not speak against it. Amtrak exists despite passenger rail travel in the United States being fundamentally unprofitable, but within its limitations it has done a relatively good job: on-time rates better than that of commercial airlines, 80% customer satisfaction rate, and double-digit year-on-year passenger growth every year for the past decade.

If such services could be provided on a for-profit basis, the private sector would already be providing them. But the fact that this isn’t the case doesn’t mean that they aren’t worth having at all – just that the private market isn’t the perfect mechanism for providing literally every single good and service we might need. In cases where the market is unable to adequately provide important goods, then, we really are better off letting the government step in to fill the gap – and the economic reasons for this are perfectly understandable.

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