This document discusses the role of government in the economy from historical and theoretical perspectives. It explains that governments adopt different economic systems like socialist, capitalist, or mixed based on their socioeconomic conditions and development level. The role of governments has changed over time from more control in earlier periods to less during the laissez-faire era to more again today. Governments play both regulatory and promotional roles in economies. The regulatory role includes controlling private sectors through policies and taxes while the promotional role provides incentives and infrastructure to stimulate private sectors.

1. Chapter 2
By
Sudarshan Kadariya
JMC

2. Role of government: An overview
Regulatory & promotional role of the
government
Government response to market failure
Regulatory response to incentive failure
Regulation of environment pollution
Regulatory response to structure failure

3.  The government of a nation adopt the suitable economic
system based on her socio-economic structure and on
the basis of state of economic growth.
 The common economic system are: socialist economy -
public sector dominant, capitalist economy - private
sector dominant and the mixed economic system – the
interplay of public and private sector.
 With the adoption of appropriate economic system, the
government – by the people and for the people, tries to
make equitable distribution of income, stability of the
economy, and to ensure the adequate rate of growth.

4.  At earlier phase there was less role of government
in economic activities, the ruler control the
economy.
 In the middle age government started to control in
the economy so that till the 17th
century, there was
a major role of government in the economy.
 In late 18th
century, the ‘invisible hand
doctrine’ was introduced in order to reduce the
role of government.

5.  In late eighteenth century, Adam smith came out
with an analysis of market trends of production
and consumption, wherein he concluded that the
markets, if left alone, have an inherent potential of
becoming efficient. It is as if there was an invisible
hand that guides the market to a level that is good
for society. His theory has remained the
cornerstone of all economics, even after two
hundred years.

6.  Adam Smith, in late eighteenth century, proposed a theory that stated
that in a free and unregulated market, where anybody can become a
producer or a consumer, people's demand of different goods and their
production of the same good will be equal, and the allocation of their
resources for production and consumption of different goods will be
optimal for the welfare of the society. Put another way, Mr. Smith
suggested that the invisible hand of market forces of demand and
supply will achieve the most efficient level of production, consumption
and distribution of goods in the society.
The idea of an invisible hand guiding the market to the best social
outcome created a very strong reason in favor of free markets, and has
been the standard argument against governments controlling production
or consumption in any form that interferes with the free market.

7.  In19th
century, the voice against the government
heightened so that role of government in the economy
declined dramatically. The laissez-faire
policy/doctrine/policy was evolved against the
government intervention. “Government was considered
the best which does the least” as per laissez-faire.
 laissez-faire, policy of minimum governmental
interference in the economic affairs of individuals and
society. The origin of the term is uncertain, but
folklore/legends suggests that it is derived from the
answer Jean-Baptiste Colbert, controller general
of Finance under King Louis XIV of France (around
1665), received, when he asked industrialists what the
government could do to help business: “Leave us
alone.”

8.  20th
century experienced both the bad and good
effects of laissez-faire policy
 Good news – rapid economic growth
 Bad news – exploitation of unskilled labor,
measurable social environments, monopolistic
exploitation, gap between rich and poor, etc.
 Thus, the role of the government again began to
increase all over the world.

9. (1914-1920) WW I (1914-1918)
1930’s Great Depression WW II (1939-1945)

10. 1) For equitable distribution of resources
2) To look after the public goods like defense
services and supplies
3) To curve the externalities
4) To stabilize the economy
5) To achieve acceptable rate of growth
6) To enforce the government laws – acceptable for
all.

11.  With the lesson from the past experience, the
government in 21st
century mostly adopt the
modern economic system which is the mixed
approach of boosting the economic activities for
the expansion and growth of the economy as a
whole.
 The modern economy, thus the mixed approach –
the interplay of private sector and the public
sector, the deserving sectors are segregated to
the public as well as the private sector so that it is
assumed to stabilize the economy.

13. A. Observation
B. Investment
C. Regulatory
D. Promotional

14. Regulatory & Promotional Role of the Government
A. Regulatory role: Direct and Indirect measures of the
Government to control and regulate the private sector.
For example, restrictive policies, incentive policies, operation
control, indirect tax impose, etc.
The conception of regulatory role of the government is mainly
guided by two factors
a) Economic: Concern with market failure.
b) Political: Concern with social issues - consumer rights,
equitable distribution, etc.

15.  Further, the tools of the Government to controls the private
sectors are: monetary and budgetary policy.
 Corrective and inductive control
(Chances for correction through fine, penalties, etc,
and rewards for specific works – shedding lights
through specific to general)
 Direct and indirect control
(Imposing the price limit and tax, duties, etc)
 Effect of competition
(Antitrust policy to discourage monopoly, etc)
 Promotional and regulation control
(tax subsidies, zero interest loans, R&D vs. restrictive
rules and regulations impose through laws, etc)

16. B. Promotional role: The incentives for the private sector to
flourish their operation.
For instance, providing infrastructural facilities - transportation,
communication, security, etc.
The promotional role of the government specially focuses
towards;
a) Economic growth: Creating demand of goods and services so that
the cyclical effect help to boost the economy.
b) External economies: Minimizing the const of production due to
external factors (promotional activities) or increasing the
productivity. The external factors are outside the control of a
particular company, and encompass positive externalities that
reduce the firm's costs. External diseconomies: If external factors
beyond the control of a company increases its
total costs, can be associated with market prices
increasing the factors of production.

17.  Stimulate private sector by investing through the
government.
 Providing funds
 Facilitates
 Infrastructure
 Granting incentives
 Patent facilities,
 Tax-free holiday
 Loan on low interest rate, etc

18. Thank you.