ABSTRACT
It is conventionally accepted that various forms of government intervention (i.e., intervention by government employees) into private markets are acceptable, even desirable. The most prominent examples of such ‘legitimate’ government intervention involve control of externalities and government production of certain goods and services. For both, the rationale for government intervention is often lower costs, particularly transaction costs. Excise taxes are, in theory, often a cheaper alternative to individual contracts or legal actions to control externalities; government production in some markets (roads, for example) can lower the transaction costs associated with hold-outs, free riding and revelation of demand. Maximizing social welfare in either case requires that government impose prices, either in the form of taxes or as user charges. Taxes and charges are often earmarked for particular purposes.
