The first situation is the traditional ‘capitalist’ approach where the government adopts a totally ‘hands off’ policy allowing the resources to be used by privately owned enterprise, reducing protection to local industry and agriculture by lowering import tariffs and allowing free competition. The second approach (communist) is heavy governmental involvement in the economy where all resources are publicly owned and the government decides their allocation and use. However, it is usual to find a middle path adopted by most countries including the US.
Governments cannot distinguish companies that will perform well and their reasons for entering a particular area of the economy frequently targets serving of social causes and political ends rather that those of economics. Examples are, the distribution of wealth, regulation of competition, supplying infrastructure etc. This leads to a diversion of resources to non-productive enterprises and away from private hands that could have utilized the resources more efficiently and effectively stops investment/ competition from abroad. Freeing of trade can result in competition for goods and services leading to efficient utilization of resources, improved standards of living, and economic growth. Despite this, it is necessary for governments to address certain areas that private enterprise would otherwise neglect or the benefits of economic growth would not percolate down to the economically backward sections of society. For example, the defense of the country is not an issue that private enterprise can attend; another example is the provision of health care, if completely privatized good health-care would become out of reach for large sections of the economically weak.
Either the ‘neo-classical’ rationale of market failure in the provision of public goods and need to lessen the effect of externalities etc. or the evolutionary