The Economic Rationale for Government
The public sector (i.e. the institutions and activities of government) is conventionally treated as an alternative to ‘the market’. These are often regarded as mutually exclusive, the decision being which sector should undertake a particular productive activity. The market sector is stereotyped as private, unregulated, economic activity providing output in accordance with consumers’ willingness to pay, allocation of goods and services ultimately depending on the existence or not of profits. The public sector is stereotyped as planned non-market services, provision of which is determined collectively through democratic decision-making processes, and whose allocation is according to the assessed needs of the final recipient. The crucial difference is that the user of market outputs pays a direct cost (market price) whereas the user of public sector outputs pays no direct cost, instead sharing the tax cost with all other taxpayers.
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