Topic 5: Goods and Services Produced Entirely Through Government Action

The previous topic outlined the costs of monopoly in a free-enterprise economy noting that the effects of monopoly could be avoided by appropriate subsidization of production. We now turn to an analysis of situations where government typically ends up regulating such monopolies or producing the entire output of the goods and services in question.

Police Services

Our first example is police protection. In Topic 3: The State and its Origins we noted that when the state is created, police protection of individual property rights will necessarily be introduced for the maintainence of social order. While one could imagine groups of individuals hiring a private police force to protect their interests, both positive and negative externalities would arise. To the extent that private police forces capture, fine and jail people who violate the state law and usurp property rights, individuals who do not pay for police services will also benefit by the fact that criminals are taken off the streets. On the opposite side, one would expect that police services hired by groups of individuals would be used to take advantage of people not paying for these particular police, raising the prospect of virtual implicit civil wars breaking out between pairs of private police forces. The way to avoid these externalities and ensure that the laws being enforced are those legislated by the on-going political process within the state is to have a single police force to equitably enforce state law, with the cost being borne by all individuals in fair proportions. We would expect that this could be accomplished naturally on the basis of majority rule. The tax burden will not be shared equally throughout the state to the extent that there is widespread concern about inequalities in the income distribution that involve heart-rendering poverty of certain types of citizens.

Fire Protection

As noted in our previous discussion, major positive externalities will arise with a system of privately hired fire protection services, with individuals free-riding off the services hired by their neighbors, whose paid protectors will tend to fight fires in neighboring properties to prevent spread to those having paid-for protection. Again, the best way to avoid this externality is to have a single state-owned and state-run fire department provide protective services to the whole community. And in a majority-rule situation, the level of state fire protection would be paid for by all individuals in the community in fair proportions acceptable to the majority.


In a primitive society, roads will be nothing but trails which become established naturally as people go from place to place. More sophisticated travel methods will require that land be set aside to make room for the resulting road-capital constructed and that the resources used for road construction be paid for by someone in the society. For the persons paying to receive adedquate compensation, they must collect toll money from those traveling the roads. In a society with a vast network of roads, most of which will be actually used quite rarely, the cost of collecting tolls will be very high, as will be the costs of verifying that payment has been made in situations where it is more economical to sell the right to use a road rather than charge a price for each individual passage over it. The best social policy appears to be one of having the government pay for the construction and maintenance of all roads except those for which a large group of users exists that will pay an appropriate price per fast trip along a road that is significantly better than others in the neighborhood that are made freely availiable. Private individuals will also find it useful to pay for the construction of short roads and lanes which they and their friends and visitors will be the only users.

Bus and Train Services

A somewhat different situation arises with respect to train services and bus services along roads. Payments for these services can, for the most part, cover their costs, although situations will arise similar to a non-profitable monopoly which can be induced to provide services via a social subsidy.

Airport Services

Another set of services of this sort are airport services. For large communities the povision of services at an airport is a profitable monopoly requiring useful government regulation. This will not be the case for small communities, making complete government conrol of unprofitable monopoly a requirement in this case.


The provision of electrical services in most communities is also exclusively produced by government. Control by government is necessary because the generation of electricity tends to become cheaper in larger volumes so a monopoly is natural. Also, it is cheaper to put every demander of electricity in the community on a single power grid rather than have the overlap resulting from separate grids for randomly selected users or groups of users.

For a further analysis of all the above situations we proceed to some test questions. Think about the issues and have your own answers in mind before looking at the ones provided.

Question 1
Question 2

Choose Another Topic in the Lesson