Government policy affects many aspects of people's lives and economics can help assess the effects of policy and distinguish good policy from bad. Government has four main roles in a market economy: to efficiently allocate resources, achieve an equitable distribution of income, protect property rights and consumers, and prevent unemployment and inflation. It has four tools to do this: revenue gathering through taxation and fees, spending through subsidies, purchases, and direct provision, regulation, and information provision. Any government provision should pass five tests: necessity, effectiveness, equity, efficiency, and being the best option compared to doing nothing.

1. The Role of Government Policy
• Policy is important because it affects all
aspects of people’s lives
• Economics is a fundamental tool for assessing
the effects of policy
• Economics can explain how policy works and
how it affects people’s behaviour
• Economics can help to distinguish between
good and bad policy

2. Government has four main roles in a
market economy
1. To pursue an efficient allocation of resources
2. To achieve an equitable distribution of
income
3. To make and enforce laws to protect property
rights and protect consumers
4. To prevent excessive inflation and
unemployment

3. ..and has four main tools to do this
1. Revenue gathering
• Taxation
• Fees for service
2. Spending
• Subsidies to the public
• Direct purchase from the private sector
• Direct provision to the public
3. Regulation
4. Information provision

4. Government provision must pass five
tests
1. Is it necessary?
– What would happen if there were no intervention?
2. Is it effective?
– Will it actually do what was intended?
– What are the unintended consequences?
3. Is it equitable?
– Who bears the costs and benefits?
4. Is it efficient?
– Do the benefits exceed all the costs? (productive efficiency)
– Will resource use be distorted? (allocative efficiency)
– Will it create incentives to technological change? (dynamic efficiency?
5. Is it the best option (including doing nothing)?