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The optimal size of government

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  • Philip Grossman

Abstract

In the economic analysis of the theory of government, two views of government are evident. The Pigovian view sees government as a benevolent actor striving to correct for the inadequacies and excesses of an unrestrained marketplace. The ‘Public Choice’ view of government portrays government as the tool of special interest groups as likely to generate distortions as to correct them. In this paper, a model of government that incorporates both views will be developed and then empirically tested. The model developed assumes that all expenditures by the government are inputs into the private sector production. Treating government expenditures as inputs into the production of private sector output, there is some optimal size of government that maximizes private sector output. The model incorporates a general production function for private sector output. Output is a function of private labor, private capital, and government expenditures. The Pigovian and Public Choice views of government are reflected in the assumed impact of G on the marginal productivities of L and K. The model is tested using United States data and a Cobb-Douglas production function. Estimates indicate that the 1983 level of government expenditures exceeds by 87 percent the level that would maximize private sector output. Reducing government from $ 491 billion to $ 263 billion and shifting the freed labor to the private sector would increase output from $ 1187 billion to $ 1451 billion. Copyright Martinus Nijhoff Publishers 1987

Suggested Citation

  • Philip Grossman, 1987. "The optimal size of government," Public Choice, Springer, vol. 53(2), pages 131-147, January.
    • Handle: RePEc:kap:pubcho:v:53:y:1987:i:2:p:131-147
    DOI: 10.1007/BF00125845
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    References listed on IDEAS

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    1. Riker, William H. & Brams, Steven J., 1973. "The Paradox of Vote Trading," American Political Science Review, Cambridge University Press, vol. 67(4), pages 1235-1247, December.
    2. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135-135.
    3. Peltzman, Sam, 1980. "The Growth of Government," Journal of Law and Economics, University of Chicago Press, vol. 23(2), pages 209-287, October.
    4. Peltzman, Sam, 1980. "The Growth of Government," Working Papers 1, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
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