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The role of the government in the economy


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Published in: Government & Nonprofit

The role of the government in the economy

  1. 1.  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.
  2. 2.  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.
  3. 3.  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.
  4. 4.  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.
  5. 5.  There are three views of the government’s regulatory function.  The Public Interest Theory is the idea that regulation serves the public interest by restricting harmful business activities.  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 public.  The Public Choice Approach, on the other hand, offers a final possible explanation for regulatory behavior.
  6. 6.  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 country.  Because the government is essentially a self-financed enterprise, it has to rely on taxes to be able to provide services.
  7. 7.  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.
  8. 8.  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.
  9. 9.  Spill-over costs occur when individuals involuntary bear economic costs without compensation.  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
  10. 10.  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, broadcasting, etc..
  11. 11.  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.
  12. 12.  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 .