The economic functions of government

We
have seen in the proceeding section that most real world economies tend to be a
mixture of private enterprise and public sector participation, the extent of
mixture varying with countries. Again, we saw that in recent times, increasing
emphasis is being placed on the private sector as the engine of growth and that
direct public involvement and control is increasingly giving way to more and
more private sector initiative. In spite of this trend, it is still generally
agreed that the government has some role to play in the economy, especially
given the possible failure in the operation of the market mechanism. Usually,
the constitution is always explicit on the economic functions of the government
in any country. Maunder etal2summarized the economic functions of
government as follows:

Provision of public
goods
Provision
of merit goods, and regulation of demerit goods,
Checking
externalities,
Carrying
out cost-benefit analysis,
Striving
to achieve economic objectives and stability.
We
will examine each of these in brief.
Provision of public
goods
The
government provides public goods, that is, goods that can be jointly consumed
by many individuals simultaneously. As noted earlier, the free market system by
itself will not allocate resources to the production of public goods because of
the non-exclusion principle associated with their use, even through these goods
are needed by the society. Thus, it is the responsibility of governments in
every place to provide public goods.
Provision of merit
goods and regulation of demerit goods
Merit
goods are those goods and services deemed socially desirable by the people and
government of a country. Once such goods are defined, the government
subsidizing the production or actually organizing the production of the output
itself makes them available free, or almost free to all citizens. All quasi –
public goods are merit goods. Merit goods serve two objectives. First, they facilitate
a redistribution of income, since they are largely financed out of progressive
taxation. This ultimately ensures that poorer citizens have access to a
standard of service that they could not otherwise afford. The second point is
that government subsidies for the production of these goods reduce their prices
below the market-clearing price and individuals are able to consume more of
them. Government’s provisions of educational and health facilities, for
example, will lead to a healthier and more educated citizenry which translates
to increases in human capital and higher living standards.
Demerits
goods are those goods regarded by the people and government of a national to be
socially undesirable. Examples of demerit goods include heroin, morphine, and
LSD. Government exercises its role here by taxing, regulating or prohibiting
the manufacture, sale and use of these goods. In some countries, high taxes are
placed on alcohol and tobacco because they are classified as demerit goods by
the government.
Checking
Externalities:
Externalities or spillovers are
benefits or costs that are passed on to another (or others) by somebody or a
firm in the process of producing or consuming a product or service. Since the persons
affected by such externalities are not directly involved in the production or
consumption of the commodity in reference, externalities are often called third
party effects. Externalities may be positive (when they are benefits) or
negative (when they impose some costs on the third party). Since the market
does not account for externalities in economic transactions, government is
often looked upon to correct for them. Two avenues are open to the government
for the correction of negative externalities. The first is the use of taxes,
while the second is the employment of legislations. In addition, the government
can correct for a positive externality by direct production of the commodity
concerned, or by granting subsidy (a form of negative tax) that reduces the net
price to either producers or consumers.
Cost-benefit
analysis:
A more systematic way of accounting for both
positive and negative externalities together is through the appraisal technique
known as cost-benefit analysis. In such analysis, the government attempts to
consider external costs and benefits alongside the internal (private) cost and
benefits. The total social (i.e. external and internal) costs and benefits are
then considered. The result of the analysis will inform government on what step
to take- whether to support a particular programme or call for stoppage. If the
benefit of a project outweighs its cost, there is the likelihood that the
project will be allowed to take place, irrespective of whether it is a public
sector or private sector initiative. The opposite will hold true where cost
exceeds benefit.
Striving to achieve
economic objectives and stability:
The government
assumes the position of a guard and guide in streamlining the economic affairs
of the nation, problems emanating from the day-to-day economic activities of
the country are taken care of in order to stabilize the economy. To this end
government aims to maintain full employment, keep prices steady, achieve
economic growth, achieve equilibrium in the balance of payments and
redistribute income and wealth.

Leave a Comment Here