Role of the state

Why government cares for economy? „Government intervention in the economy is inevitable because there are certain roles and responsibilities that cannot be assumed by the private sector.“ The spending decisions of consumers and business are made for reasons other than obtaining a desirable macro equilibrium. There is no reason to expect that consumers and business will spend the amount necessary to achieve and maintain full employment. 23.2.2019

Government functions in economy 23.2.2019

Resource allocation 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. 23.2.2019

Regulatory function 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 e.g. Externalities 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. Spill-over costs occur when individuals involuntary bear economic costs without compensation. 23.2.2019

Redistributive function  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. 23.2.2019

Providing public goods Public goods = 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. Public goods = 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.. 23.2.2019

Public vs. Private goods 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. 23.2.2019

Government as a moral guardian 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  23.2.2019

Role of the state (government) In summary, the economic functions of a government include*: Protection of private property and maintaining law and order / national defence. Raising taxes. Providing public services not provided in a free market (e.g. health care, street lighting) Regulation of markets, e.g. regulations on environment / labour markets / monopoly. Macro-economic management, e.g. use of fiscal and monetary policy to control business cycle – recession and inflation. Reducing inequality / poverty. *https://www.economicshelp.org/blog/21699/economics/what-are-the-economic-functions-of-a-government/ 23.2.2019

But there are often trade-offs… Government goals Influence Aggregate Demand or Supply Economic growth Clean environment Efficiency Equitable distribution of income/wealth Full employment Price stability Stabilization of business cycle fluctuations … But there are often trade-offs… 23.2.2019

Government Tools Government policies Laws State budget – taxes and expenditures Money supply Interest rates and foreign exchange rates Donations Business and citizen restrictions Public goods … 23.2.2019

Private and Public sectors 23.2.2019