Role of government

Chapter 24
Factors that
influence the
role of
government
Role of a
government
The functions of
government at local
and national levels
The government as a producer

A government may produce products which it believes are:

 Products of national importance
 products that are produced by a natural monopoly
 Products that are essential and hence should be available to all.
Also, it may produce those commodities which the private sector may under-
produce or not produce. The government as a producer generally caters to:
 Key industries or national champions
 An industry that is vital to the economy in a country. For example, in the
US, the financial services industry is a key industry because
it supports many American jobs.
 World beaters – have an advantage over rest of the world

https://www.london.edu/think/turning-national-champions-into-global-bran
ds
  Natural Monopolies:
Natural monopolies, may be run by the government to
 prevent consumers being exploited by a private sector firm charging
a high price
 Cater to the high demand/output
The  Examples: railways, electricity, water etc.
government as  Essential Products:
a producer Most governments produce at least some goods and services that
they think are essential.
 affordable housing to rent.
 education
 health care

some governments produce them and provide them to people free

of cost or at subsidized prices.
 Merit Goods:
Merit goods are those goods and services that the government
feels that people will under-consume, and which ought to be
subsidised or provided free at the point of use so that
consumption does not depend primarily on the ability to pay for
the good or service.
Besides being essential products, education and health care,
insurance, library services, museums, art galleries etc.
To stimulate the consumption of merit goods, governments also
 pay private sector firms to produce them
 Run awareness campaigns- provide information about their
benefits
 in some cases make their consumption compulsory - insurance
 Public Goods:
A public good is an item consumed by society as a whole and not
necessarily by an individual consumer.
 Public goods are financed by tax revenues.
 All public goods must be consumed without reducing the
availability of the good to others
 Public goods cannot be withheld from people who do not directly
pay for them. For example, it is not possible to exclude someone
from enjoying the benefits of street lighting even if they are not
prepared to pay for them directly.
 National defence, sewer systems, public parks and other basic
societal goods can all be considered public goods. Law
enforcement is also an example of a public good.

This is why governments produce them or pay private sector firms

to make them and raise finance through taxation
 The government employs workers and managers to
operate its state owned enterprises. Employing people
helps a government to achieve some of its aims for the
economy.
 To reduce unemployment, the government can
The employ more workers.
government as  To control rises in prices, the government can limit
wage rises of its own workers and the prices charged
a employer by its enterprises.
 It can also set an example in terms of employment
practice by, for instance, providing its workers with
good quality training, preventing discrimination and
ensuring good pensions to its workers.
The role of the
government at
an
international
level
  Full employment – people who are willing and are able to work
can find a job. Higher employment leads to increase in production
in an economy which in turn increases the standard of living of
people.
Unemployment rate = no of people unemployed/total labour force
× 100
Aims Of  Price Stability – frequent change in prices can be damaging for an
Government economy. Due to frequent rise in prices:
 A country’s products can lose their demand, internationally
 Producers raise their prices in expectation to higher manufacturing
costs in the future
 Consumers purchase in the fear of higher costs in the future
The government aims at to keep the rise in prices steady, considering the
fact that it can be an indicator of a better quality and more features.
 Economic growth – Economic growth is an increase in the value
of goods and services produced by an economy over time.
Economic growth is a vitally important measure for several
reasons:
 Economic growth is about an increase in production within the
economy
 It is important because our living standards are influenced by
our access to goods and services
 economic growth can increase the life span of people as it can
provide for better nutrition and healthcare facilities.
Why economic growth is important for businesses
Economic growth provides greater potential or opportunity for:
 Increased profits
 A rise in average living standards
 The creation of new jobs
 Lower unemployment
 Increased tax revenues for government - used to fund more
spending on government services
 Improved business confidence
 Increased capital investment
 Technological innovation
There are two main ways to measure economic growth:
 Actual economic growth - the actual rise in production (GDP)
 Potential economic growth – the rise in the capacity or
potential of a country to produce as its factors of production
improve.
 Macroeconomics is a study of how a national economy works. It
involves understanding the interaction between changes in total
demand and output and national income, employment and price
inflation in an economy.
The Macroeconomy is one big market consisting of the total demand for
macroeconomi all goods and services available in the economy and the total supply
of all goods and services.
c aims of The government fulfills the macroeconomic goal of economic
government growth by contributing towards the
 Aggregate demand
 Aggregate supply
  Aggregate demand is the total demand for an economy’s
products. It includes:
 Consumer expenditure on goods and services
 Investment expenditure by firms on productive assets such as new
machinery and vehicles
 Public expenditure by the government on capital and current items
 Exports or expenditure by overseas residents on goods and services
Aggregate produced in an economy

Demand
 The government tries to control the aggregate demand through its demand-side
policies. They do it by using a number of policy instruments. These are :
 Total public expenditure – Increasing public expenditure can boost total demand
and therefore stimulate higher output. Public Expenditure can be as follows:
 Capital expenditure – A non-recurring expenditure which is incurred on building
durable assets (multipurpose river projects, highways, steel plants etc.)
 Current/revenue/consumption expenditure – Expenditure which is incurred year after
year. (police, judiciary, public health, education etc.)
Demand-side  Transfer payments - a payment made in which no goods or services are being paid for,
such as a benefit payment or subsidy. (old-age pensions, unemployment allowance,
policies sickness benefits, interest on public debt during a year etc.)
 The overall taxation policy –
 Consumers - the amount consumers have to spend on goods and services depends on
their disposable income (income after deduction of income tax).
 Businesses – taxes on profits will effect the amount of money firms have to invest in
new businesses and their demand for labour.
 The rate of interest – as interest rates rise consumers may save more and/or
borrow less to spend on goods and services. This may also encourage investments
from overseas. As interest rates fall the firms may borrow more to invest.
 Aggregate supply is the total output of producers in an economy.
Supply-side policies aim to boost the aggregate supply of goods and
services in the economy. This results in:

Aggregate 
Economic growth
Increase in employment
Supply 

Increase in exports
Reduce inflationary pressure
& These policies include:
Supply-side  Specific public expenditure such as subsidies
 Changes to individual taxes, such as reducing the taxes on wages
policies and profits to increase reward from work and enterprise
 New regulations and reforms for example introducing legislation to
outlaw unfair trade practices.
  Redistribution of income
Government aims at redistributing incomes between rich and poor
to lower down unequal distribution of wealth. The government
meets this objective through its taxing and spending activities.
Aims Of  Rich are taxed more
Government  The money collected is spent on the uplifting the poor

 Balance of payment stability

Encouraging exports and discouraging imports