Are all public expenditures necessary?

This question has to do with the size of the public sector. What should the government spend money on? What is the role of the government in the economy? Some centuries ago, governments provided relatively few public services. Nowadays, we generally think that the government should serve various functions from national defence to education, from fire and rescue services to environmental protection. Whether the government should spend money on some areas, however, is more controversial. For example, in some countries, pension schemes are mostly provided by the public sector, while in others, there is a tendency to rely more on private sector providers. Whether a public expenditure is regarded as necessary then depends on the political and historical conditions of a country.

It is generally believed that the public sector should provide public goods, that is, goods that are, in economic terms, non-excludable and non-rivalrous. National defence is an example of public goods. When it is provided, everyone is serviced, and no one is made less protected. Public goods can hardly be provided by the private sector, especially because of the free rider problem. Nobody is willing to pay for something that would be freely available for everyone else anyway. In this scenario, nobody would be willing to pay for the public good. It is up to the government to acquire the financial resources that are needed to provide the public good, typically through taxation, and to produce or contract out the production of the public good.

Some argue that the public sector should spend money on the production of goods that are not really public goods but which are desirable to have because of the widespread positive effects on the society. Take health care for instance. Many health services are private goods, because it is possible to exclude patients from access if they do not pay. And if care is provided to one patient, then it is not available for another. However, in many countries it is believed that health services are so important for the wellness of the population that nobody should be excluded and that the government should provide them.

This is an instance of a merit good, something that the public sector spends money on because of normative argument about the worthiness of the service.