Abstract
The economic role of government is pivotal. The government sets the rules of the game. It establishes and defines property rights, which are necessary for the smooth operation of markets. Public policy is an important determinant of economic stability. In addition, the government sometimes uses subsidies to encourage the production of some goods while applying special taxes to reduce the availability of others. In a few cases—for example, education, the mail service, and local electric power, the government becomes directly involved in the production process. Because of government's broad economic role, it is vital that one understands how it works and when it contributes to the efficient allocation of resources. This chapter focuses on the shortcomings of the market and the potential of government as an alternate means to resolve economic problems. It discusses issues involving market and public sector organization. Political economy—how the public sector works in comparison with the market—is an integral and exciting aspect of economic analysis.
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