Role Of Government In Economics

Role of Government

The government provides the legal framework and the services needed for a market economy to operate effectively. The legal framework sets the legal status of business enterprises, ensures the rights of private ownership, and allows the making and enforcement of contracts. Government also establishes the legal "rules of the game" that control relationships among business, resource suppliers, and consumers. Discrete units of government referee economic relationships, seek out foul play, and impose penalties.

Government intervention is presumed to improve the allocation of resources. By supplying a medium of exchange, ensuring product quality, defining ownership rights, and enforcing contracts, the government increases the volume and safety of exchange. This widens the market and fosters greater specialization in the use of property and human resources. Such specialization promotes a more efficient allocation of resources.

The government improves the operation of a market system by maintaining competition. Competition is the basic regulatory mechanism in the market system. It is the forcer that subjects producers and resource suppliers to the dictates of consumer sovereignty. With competition, buyers are the bosses, the market is their agent, and businesses are their servants. On the other hand, if a monopoly takes place, the monopolist is able to charge a higher-than-competitive price. Producer sovereignty then supplants consumer sovereignty. In the United States, the government has attempted to control monopoly through regulations and through antitrust. However, a few natural monopolies exist; for instance, some firms that provide local electricity, telephone, and transportation services are considered regulated monopolies.

The Market is impersonal and may distribute income more inequitably than society desires. It yields very large incomes to those whose labor by virtue of inherent ability and acquired education and skills, command high wages. Similarly, those who, through hard work or inheritance, posses valuable capital and land, receive large property incomes. In a similar manner, many other individuals have received only modes amount of education and training, and have accumulated or inherited no property resources. Government can lessen income inequalities through a variety of policies and programs; for instance, transfer payment, market intervention, and taxation.

Market failure occurs when the competitive market system produces the "wrong" amounts of certain goods and services or when it fails to allocate resources whatsoever to the productions of certain goods and services whose output is economically justified. The government can correct for the overallocation of resources associated with spillover costs through legislation or taxes; it can offset the underallocation of resources associated with spillover benefits by granting government subsidies. Also, the government provides certain public goods, because they are indivisible and free-riders can obtain them without payment. The government also provides many quasi-public goods, because of their large spillover. Quasi-public goods are goods that may be produce in such a way, that the exclusion principle would apply.

Unemployment and inflation are two problems that the government addresses in order to promote economic stability. When private sector spending is too low, the government may try to augment it so the total spending, private plus public, is sufficient to achieve full employment. It does this by increasing government spending by lowering taxes to stimulate private spending. Also, it often takes actions to lower interest rates, thereby stimulating private borrowing and spending. Inflation is a general increase in the level of prices. Prices of goods and services rise when spenders try to buy more than the economy's capacity to produce. When total spending is excessive and becomes inflationary, the government may try to reduce total spending by cutting its own expenditures or by raising taxes to curtail private sending. It may also take actions to increase interest rates to reduce private borrowing and spending.

The main categories of Federal spending are pensions and income security, national defense, health,