Professor Grubert of MIT points out that nearly half of the Federal Government spending is on social insurance programs, like social security, Medicare and Medicaid, Supplemental Nutrition Assistance Program or food stamps, the Earned Income Tax Credit, and so on

In order to understand whether the spending of the government on these programs can be rationalized by market failures, we first need to analyze what these programs are and what type of a market failure is occurring.For instance, the Medicare and Medicaid programs are targeted at the old and needy respectively who are either too old/disabled or too poor to pay for their health insurance. Similarly, the food assistance program is also for those who have very low levels of income and need assistance for the attainment of basic level of nutrition.

Now, if all these programs were treated as a type of public good/service and left on the private markets to provide, there would have been under-provision or no-provision. This is because the 'consumers' of these services cannot pay for their consumption. Private markets operate on the principle of profit-maximization and they would have zero incentive to provide goods and services to the public for free. This would have resulted in a huge market failure. Hence, the government's intervention in this type of a market failure becomes very important.