Empirics
Government expenditure
Below in the Figure 2 the structure of government expenditures in European Union. is shown. These fields such as defence, environmental protection, public order and safety, health, education etc. are those where free market turns out to be inefficient.
Defence, for instance, is a good that is not produced by private sector at all. Health services on the other hand are produced by private sector but one private consumer of these services obtains only part of the welfare gain these services generate (this market failure is called positive externality). As a result this consumer consumes too few of these services from the social point of view. Therefore, there is rationale for government to intervene: to produce health services or at least to finance these services.
It should be noticed that social protection expenditure that represents roughly one fifth of GDP is related to the third government function, redistribution function that is discussed on the following pages.
Figure 2. Government expenditure by function in 27 EU member states
Source: Eurostat, 2012a