Skip to main content

INSIGHTS BLOG > Role of Government - Part 2: Guidelines for Government Intervention

Role of Government - Part 2: Guidelines for Government Intervention

Written on 24 August 2012

Ruth Fisher, PhD. by Ruth Fisher, PhD

By taking some lessons from current and past successful and unsuccessful aspects of government, we can establish some guidelines to help determine the role government should play in society that would be consistent with the previously stated goal in Part 1 of this commentary of finding the optimal mix of liberty, opportunity and government.

But first, I define a few terms that I use frequently in these blog discussions.

Producer surplus or profit: When a producer provides any product or service to a customer, the producer surplus or profit is the price the customer pays for the product or service, less all the costs the producer incurs to make the product or service available to that customer.

Consumer surplus: When a consumer purchases and/or consumes a product or service, the value he places on that product or service, which is also the maximum amount he would be willing to pay for the product or service, is called his reservation price. The consumer surplus is the consumer reservation price, less the actual price the consumer pays for the product our service. In other words, consumer surplus is the extra value a consumer gets from a product or service that is above and beyond the price he pays for it.

Private value and cost: The private value associated with an action is the value to an individual (producer or consumer) of undertaking an action. Likewise, the private cost associated with an action is the total costs (tangible, intangible, pecuniary (monetary), non-pecuniary, etc.) to the individual of undertaking an action.

Externality: An externality is any benefit or cost associated with an action undertaken by any individual or group that is borne by other members of society as well, as opposed to solely by the individual or group alone. An example of a negative externality is automobile pollution: when an individual drives his car, he creates pollution that negatively affects the air quality for all individuals in the area. An example of a positive externality is an individual’s garden: when an individual creates a garden in his yard, in addition to the beauty the individual himself enjoys from the garden, all passersby are also able to enjoy the beauty of the garden.

Social value and cost: The social value associated with an action is the collective value to all members of society associated with the undertaking of an action by any individual or group. Likewise, the social cost associated with an action is the total costs (tangible, intangible, pecuniary (monetary), non-pecuniary, etc.) to all members of society associated with an action. For example, the social cost of pollution created by an individual who drives his car is the total costs to all members of society in the area of the decrease in air quality associated with that automobile. Likewise, the social benefit of a garden in the enjoyment the gardener gets from his garden, plus the enjoyment all other passersby get as well.

Now, onto the guidelines for a form of government that will provide the optimal mix of liberty, opportunity and services for the members of society.

1. Efficiency

Any responsibility undertaken by government should be efficient, that is, the total social costs of government intervention should not outweigh the total associated social benefits.

Former New York Governor Mario Cuomo once said, "It is not a government's obligation to provide services, but to see that they are provided." Along these lines, it should be made explicit that any government responsibility that can be undertaken more efficiently by the private sector should be done so.

Many would argue that the private sector cannot be trusted to do what’s in the best interest of the people, that they are only interested in making a profit, and will cheat the people if they can. In response to this argument, I would claim that government workers do not necessarily have any greater interest in doing what’s in the best interest of the people than does the private sector. Milton Friedman eloquently describes the situation in this short commentary on Socialism vs. Capitalism. I believe it all comes down to setting the proper incentives or rules, so that what private or public workers have an incentive to do is exactly that which is in the best interest of the people.

2. Time Limits on Laws

“The closest thing to immortality on this earth is a federal government program”

–- Ronald Reagan

Any responsibility undertaken by government should have a specifically designated end-date or trigger to determine when the responsibility is no longer relevant and/or efficient. If there is no readily apparent end date or trigger at the time the responsibility is undertaken, the total social costs and benefits of the responsibility should be assessed regularly (e.g., every five years), with regular modifications to the original regulations being made as the environment evolves.

3. Term Limits for Politicians

While a certain sense of continuity in government can be a good thing, it seems that the costs associated with having career politicians (e.g., corruption, special interest, self-dealing, politicians not being subjected to the laws they create, etc.) outweighs the benefits. As such, I would propose term limits for each office in government.

Term limits would increase the likelihood that people who come to Congress would anticipate returning to careers in the private sector and therefore would, as they legislate, think about what it is like to live under the laws they make.

-- George Will

Americans know real change in Washington will never happen until we end the era of permanent politicians. As long as members of Congress have the chance to spend their lives in Washington, their interests will always skew toward spending taxpayer dollars to pay off special interest supporters, covering over corruption in the bureaucracy, fund-raising, relationship-building with lobbyists, and trading favors for pork; in short, amassing their own power.

-- Senator Jim DeMint

Of all the reforms the freshmen (congressmen) wanted to bring to Washington, I believed setting term limits was by far the most important. Nothing would change the culture, the policies, more than replacing career politicians with citizen legislators. Political careerism, more than anything else, has separated Washington from the people. Careerism perpetuates big government and is a constant corrupting force in the system.

-- Senator Dr. Tom Coburn

4. Minimize Corruption

Wikipedia defines corruption as “payment for services or material which the recipient is not due, under law.” Corruption violates the rights of individuals by inhibiting free access to resources, and it decreases efficiency in society by encouraging favoritism rather than meritocracy and by increasing the costs of doing business.

While it’s easier said than done, minimizing the amount of corruption in government can be achieved, first, by eliminating career politicians through the establishment of term limits described above. And second, minimizing corruption can be promoted by eliminating any types of payments to politicians, including payments by special interest groups, payments by lobbyists, and campaign donations. Corruption would also be curtailed by establishing a moratorium, say, of five years, on politicians accepting employment from the industries they have overseen.

5. Clear Winners Compensate Clear Losers

My education in economics has taught me to seek to maximize the size of the pie, independently of the distribution. The theory behind this objective is that as long as the pie is made as large as possible, society as a whole will be better off because clear winners can always compensate clear losers. In reality, however, much government intervention has resulted in cases of clear winners and clear losers, but where the losers fail to receive any sort of compensation.

Take, for example, the construction of a public good (a road, a windmill, a homeless shelter) near an inhabited area. In some cases the area has been zoned for the public good. In these cases the land values reflect the option to place the public good in the zone, that is, housing, land, and/or business prices are lower when it is known that a freeway may be built nearby. However, when areas are not zoned for particular types of public goods, yet one is constructed in an inhabited area, the community as a whole may clearly benefit, but inhabitants located near the newly constructed public good may suffer unexpected decreases in property values, not to mention undue noise, traffic, litter, etc. In these cases, the community should be required to compensate the inhabitants who are adversely affected by the new construction.

In this vein, I propose a guideline that any law which clearly advantages some citizens and clearly disadvantages other citizens should require the winners to compensate the losers. As per the first guideline, the total benefits of any qualified proposed law will exceed the total costs. What this guideline says is that to the extent that there are clear winners and clear losers of a proposed law, the benefits to the winners should be large enough that they can compensate the losers and still have enough benefits remaining to still want the law to be passed. This guideline would therefore prevent laws that only marginally benefit certain citizens while imposing clear costs on others.


I’d be interested to hear any suggestions for other guidelines.


Continue to Part 3