Public Spending and Private Services: Macroeconomic Aspects.

A general equilibrium model with household production and a government service production sector is developed. The authors study the consequences of increased tax-financed government spending for employment, unemployment, and the trade balance. It is also shown that increased transfers to households reduce market output of services, encourage household service production, and improve the welfare of employed households. The consequences of increased government service production for the welfare of employed and unemployed households depend on the degree to which government services are substitutes to market services and services produced by households. Copyright 1990 by Royal Economic Society.