1. have a positive effect on wealth if the government is producing goods that the private sector would not produce.
2. not affect wealth if the social benefits of the increased goods and services made available by the government equal the value to taxpayers of the goods that could be bought with the funds that are taxed away.
3. do both of the above.
4. do neither of the above.
Choose the correct option.
Option 2 is the correct one. By definition, any activity that produces benefits equal to its alternative opportunity cost has no effect on wealth. Any crowding out of private production by goods supplied by government results from the substitutability of public goods and services for private goods and services and is independent of any wealth effects. Also, there is no reason why an increase in the goods and services supplied by government that the private sector does not supply will necessarily increase the level of wealth---it will depend on what those goods and services are. This makes option 1 false.