Government intervention in the economy is inevitable
because there are certain roles and responsibilities that
cannot be assumed by the private sector.
A government is supposed to guide and direct the pace of its
country's economic activities. It is also supposed to ensure
that growth is steady, employment is at high levels, and
that there is price stability. Additionally, a government
should adjust tax rates and spending, so that it is able to
speed up or slow down the economic growth rate.
The visible hand of the government in the economy is
manifested when it intervenes to correct identified flaws
in the market mechanism.
Government displaces private business by owning and
operating certain enterprises (like the military); it
regulates business (like telephone companies); spends
money on space exploration and scientific research;
imposes taxes on citizens and redistributes the proceeds to
the people; and expedites the use of fiscal and monetary
power to promote economic growth and development and
to tame business cycles if necessary.
Resource allocation means the economic management
of natural resources. If there are certain limited
resources that need to be divided among individuals
or projects, this is where resource allocation comes
into play. It is usually one of the forms of project
management. The allocation function is that part of
government tax and expenditure policy which is
concerned with influencing the provision of goods
and services in the economy.
This means creating conditions to promote
competition among producers, as well as
the welfare of consumers.
Regulation is a form of intervention on
the part of the government when the
market is likely to fail.
There are three views of the government’s regulatory
The Public Interest Theory is the idea that regulation
serves the public interest by restricting harmful business
The Industry Interest Theory of Regulation asserts that
regulation is often tailored to serve the interests of
regulated industries instead of those of the general
The Public Choice Approach, on the other hand, offers a
final possible explanation for regulatory behavior.
It refers to the government’s role in influencing the
distribution of income among the population.
Through the power of taxation and expenditures, the
government can affect income distribution within the
Because the government is essentially a self-financed
enterprise, it has to rely on taxes to be able to provide
Experience has shown that a competitive market
economy can achieve most of its objectives. However,
the market is not able to achieve all of its objectives.
Therefore, the government intervention in the
processes of production and distribution is sometimes
necessary to correct certain inadequacies of the market
system. This provide another market-based
justification for government activity.
One of the areas of market “Failure” that
government seeks to correct is known as
externalities, or unintended consequences of
actions or policies.
There are two kinds of externalities: Spill-
over costs and Spill-over benefits.
Spill-over costs occur when individuals
involuntary bear economic costs without
Positive externalities refer to spillover benefits.
Spill-over benefits occur when individual receive
economic benefits for which they have not paid.
Negative externalities refer to spillover cost
A commodity or service that is provided without
profit to all members of a society, either by the
government or a private individual or organization.
The benefit or well-being of the public.
An Example of it is the protection provided by
police, fire departments, and the military,
transportation, communication, health, insurance,
A private good is the opposite of a public good.
Examples of private goods include food, airplane rides
and cell phones.
Private goods are less likely to experience the free rider
problem because a private good has to be purchased - it
is not readily available for free. A company's goal in
producing a private good is to make a profit. Without
the incentive created by revenue, a company is unlikely
to want to produce the good.
Most government action is justified either to
maintain competition or to correct market
failures. Government, however, has yet another
role in the economy. It preserves or guards the
ethical values and beliefs of the society .