James d. Gwartney

Video:
Recalculating Government Property
The second primary function of government, the productive function
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, involves the
provision of activities that are difficult to provide through markets. There is both an indirect
and direct component of this productive function. The indirect component involves the
creation of an environment for the efficient operation of markets. As noted, a legal structure
that protects property rights and enforces contracts enhances gains from trade and market
efficiency. Similarly, monetary arrangements that provide residents with access to money with
stable purchasing power across time reduces uncertainty and facilitates gains from exchange.
The provision of a stable monetary and price environment is one of the most important
productive functions of government. As discussed in Part 2, Element 5, when governments
perform this function well, people will invest more, cooperate more fully through trade, and
achieve higher income levels.
Sometimes the productive function of government is more direct. There are some
goods for which it is difficult to establish a one-to-one relationship between payment for and
receipt of the good. For example, national defense is jointly consumed by the citizenry. It
would be virtually impossible to provide some citizens with protection against foreign
aggressors without simultaneously providing it to all. Markets will tend to produce too little of
goods with such characteristics. As a result, government provision may improve economic
conditions. This issue is considered in more detail in Element 3 below.
In other cases, it may be very costly to monitor usage and collect payments directly
from users. When this is the case, it may be inefficient to provide such goods through markets.
Roads, particularly those in cities and towns, provide an example. The cost of collecting fees
and thereby charging users directly for their use would be exceedingly high. Thus, it is
typically more efficient to make most roads available to all and finance them through taxation.
As we have stressed throughout, getting the most value from our resources requires that
actions be undertaken only when the benefits exceed the costs. This principle applies to
government as well as market activity. Unfortunately, when government action involves

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projects financed with taxes or through borrowing, both benefits and costs are difficult to
measure. In the marketplace, the choices of buyers and sellers reveal information about
benefits and costs. Consumers will not purchase goods unless they value them more than their
price. Similarly, producers will not continue to supply goods unless they can cover their costs.
But the information provided by the choices of consumers and producers is lost when the
government undertakes an activity and finances it with taxes. There are no buyers spending
their own money and thereby revealing information about their benefits. Moreover, the
revenues paid to the suppliers were extracted through compulsory taxation and therefore they
provide no assurance that the project is valued more than its cost.