Summary on the Role of Government

We have considered a family of cases in which the assumptions underlying the Fundamental Theorem do not apply. What all these cases have in common is that it is practically impossible for people to be charged (in the market) for the benefits they gain or to be compensated for the costs they bear. This means that market equilibrium will be inefficient in these cases.

There are four major cases.

Public Goods

Free provision by government is efficient.

Quasipublic goods

The case is less clear, but government provision or support might in some cases improve on market outcomes.

External costs

Markets will overallocate resources. Regulations or penalty taxes to limit this may be in order.

External Benefits

Markets will underallocate resources. Subsidies may be proposed to offset this.