The government determines, in the legal sense, if a transaction is or is not fair. Indeed, it is only the government that has the power embodied by Leon Walras' famed auctioneer, although there is no government in history, nor is there likely ever to be such a government, that can do what the auctioneer was asked to do in Walras' general equilibrium system. In addition to determining the rules by which all economic agents must conform in order to be acting legally, the government is itself an economic agent. The government produces goods and services, charges its citizenry and other institutions functioning within its boundaries for its services, and can force the redistribution of resources from one economic agent to another. Every action of the government influences the behavior of other economic agents.
Government is a critical determinant of the relative health of the economy.
In an economic downturn, a recession or depression, the government is the only institution likely to have the ability to act in a countervailing manner to reduce the severity of the downturn or even generate a reversal of trend. The effectiveness of such government action is a question of the proper mix of public policy, often in the form of changes in spending, taxing, and regulation. Public finance has produced lively debates over the relative effectiveness of different types of such policies, and these are issues we shall discuss in detail this semester. All rights reserved.