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role of government


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role of government

  1. 1. Chapter 2 By Sudarshan Kadariya JMC
  2. 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. 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. 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. 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. 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. 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. 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. 9. (1914-1920) WW I (1914-1918) 1930’s Great Depression WW II (1939-1945)
  10. 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. 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.
  12. 12. 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 16th 17th 18th 19th 20th 21st Role of Government in Economy: at a glance Ratio: Role of Govt./Economy
  13. 13. A. Observation B. Investment C. Regulatory D. Promotional
  14. 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. 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. 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. 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. 18. Thank you.