ABSTRACT
According to conventional macroeconomic analysis, the government sector arbitrarily decides the levels of public spending and taxes in order to attempt to stabilize the economy. The government alters its spending or taxes to produce some desirable effect upon national output and employment, prices, interest rates or exchange rates. Government spending is confined to spending on domestic goods in the standard analysis. And the only benefit of government spending is that - to the extent that it does not replace private spending on domestic goods either directly (by offering a substitute for privately-produced goods) or indirectly (by pushing interest rates, product prices or the value of domestic currency higher) - it increases national income. 1 In the present study we explore a more basic reason for government activ-
ity in democracies. In this study a government sector exists not to attempt to stabilize the aggregate economy, but to produce certain goods and services that the private sector wants it to produce. Presumably, these goods are either "non-rival in consumption" or their "benefits are non-excludable in payment" so that it is difficult for the private sector to produce them profitably.
