Governments Spending Money: Budgets

If you’ve got something that you can’t prevent non-paying consumers from using, and that doesn’t actually diminish with more people using it, how do you work out what it costs, and who should take care of it? That’s the free rider problem – if we can get it for free, we’ll probably try, but someone’s got to keep it going. Some people say privatise it, but other people say that doesn’t always work.

Some of the arguments around state or private ownership are based more on principle than efficiency – but in certain sectors, called ‘natural monopolies’, even hard-line free market proponents tend to think state-owned is the way to go.

So why is what I buy and sell anybody else’s business? The thing is, pretty much nothing happens in isolation – everything will have a spillover effect of some kind, good or bad. That’s when it becomes everybody’s business. Some economists call these spillover effects “externalities”, because it’s a decision that affects more people than just the buyer and seller (the effect is external to the exchange), but isn’t reflected in the price.

It’s really important to emphasise that economics is by no means the only factor influencing how governments decide what to spend on. People’s principles on what a secure and fair society looks like are what guides a government’s welfare programmes, education and health systems, and infrastructure. Economic arguments are just one part of a much, much bigger conversation.