The Government Functions and Scope

EconomicsArticles / Tutorial Titles

A Government plays a significant role in an economic system. As economies cannot provide all the goods and services that the members of it desire, the governments must intervene in the system to make scarce things available in the economy. The basic questions of economies, such as for what, how and whom should the goods be produced, and how much of these products must be produced remain central to all economies.

The economies cannot decide all such motives on their own and the governments exist to provide a balance among various factors of production. That is why the functions of government are considered valuable and indispensable.

Resource Allocation Function

Resource allocation refers to the process in which the various factors of production are put into use in whichever way they may be used. It includes the decision of how much of goods to be produced in order to put the scarce resources to their optimal use.

The resource allocation in the private sector is determined by market supply and demand and the price mechanisms that are governed by consumer choices and producer’s profit motives. The state’s allocation, in contrast, is dependent on revenue and expenditure which are part of budgeting. So, in the real world, the allocation of all resources is done via market and government-led allocations.

Another notable point here is that while private goods are sufficiently produced, the production of private goods is not so sufficient. It is known to all that a perfect distribution of resources is possible only in perfectly competitive markets where both private and public goods are produced sufficiently. However, since perfect market conditions are only hypothetical, there is an absence of production of private goods in the market.

Market failure which is responsible for inefficient allocation of resources occurs due to the following reasons −

  • Monopoly and imperfect competition lead to higher prices and underproduction.
  • Failure of markets to provide collective goods that are consumed commonly by all members of an economy.
  • Externalities caused by consumption that cannot be controlled by the consumers, such as pollution.
  • Factor immobility that causes inefficiency and unemployment.
  • Imperfect competition, and
  • Income and wealth inequalities.

It is obvious that the government must intervene in order to remove these market imperfections that create barriers to achieving social welfare goals. Without government intervention, there is a risk of misallocation where certain goods are produced in excess while some others are produced too less. In brief, market failures are the reason behind the government’s allocation function.

Governments can affect resource allocation in an economy via various modes, some of which are the following −

  • Governments may produce economic goods, such as energy and road transportation.
  • Governments may control private allocation by incentives and taxes, such as providing subsidies to products that increase social welfare while increasing taxes on alcohol.
  • Competition policies may be opted by governments to structure industry and commerce.
  • Regulatory activities also control the allocation of resources
  • Legal and administrative frameworks also control the allocation of resources
  • A mixed option may also be adopted by governments to allocate resources evenly and for the benefit of society.

Distribution Function

The aggregate wealth and output of economies have grown tremendously in the last decade. However, the distribution of wealth has not been distributed evenly. Therefore, there are gaps in income and wealth among households that the government tends to remove for a smooth-running society. It has been noted that when the responsibility of the distribution of wealth is left to markets, wide skewing occurs. Therefore, governments must intervene to ensure a more desirable and justified distribution.

The distributive functions of governments are related to the question which is for whom should an economy produce goods and services.

Thus, the distributive function is based mainly on two factors of distributive justice - equity and fairness.

The aims of distributive function are, therefore, the following −

  • Redistributing income for equitable distribution of societal output among households.
  • Advancing the deprived members of an economy.
  • Equal opportunities, wealth, and income for all members of an economy
  • Security for people who are suffering from hardships regarding the availability of resources
  • Maintaining a minimal standard of lifestyle among the members of an economy.

Some of the examples of means through which aims of distribution functions are achieved include the following −

  • The policy of taxation, where the rich ones are taxed more while the burdens of tax are lifted from the shoulders of the poor households.
  • The proceeds obtained through the progressive taxation system are being used to finance public services, such as highly subsidized foods for the poor.
  • Reservations and preferences of some sections of the community in jobs and other opportunities.
  • Regulations of manufacture and sale of some select commodities to ensure good health and well-being of consumers.
  • Special schemes for vulnerable and rural populations.

Some economists believe that in the case of the exercise of distributive functions, there exists a conflict between equity and efficiency. This means that redistribution policies that get intertwined with producer choices or consumer choices can have efficiency costs or deadweight losses.

Stabilization Function

There is a proposition in market economy that a market economy cannot generate full employment or price stability automatically and government intervention is required to achieve this aim. Business cycles run on their own and without proper government intervention the instabilities in an economy, such as recession, may get prolonged.

There may also occur stagflation which is a combined effect of stagnation and inflation to make the conditions worse. Moreover, increased international interdependence may shift problems from one country to another. For such reasons, the stabilization of an economy should be among the top priorities of governments.

Stabilization is concerned with economics in terms of the following factors −

  • Utilization of capital and labor employment
  • Overall income and output
  • Common price levels
  • Balance of international payment

Regarding the stabilization function, the government policies have two major components −

  • The overall effect is obtained by the balance between the resources put into the economy and the resources taken out by it. Examples of resources put into the economy include expenditures while the resources taken out from the economy include taxation, charges, and borrowing.
  • The microeconomic effect obtained by the policies the government adopts.

The government's stabilization function may take monetary and/or fiscal forms. On the expenditure side, the government may choose to boost the economy. The injection of more money into the economy increases demand.

In fact, expansionary fiscal policy is adopted to avoid recession while the contractionary policy is adopted by the government to avoid inflation. Fiscal policy has a strong influence on employment, economic growth, price stability, and external balance.

Conclusion

The government’s functions are pivotal for the well-being of an economy. By allocating, distributing, and stabilizing resources, the government controls the economy for the well-being of society. Without government intervention, there may be widespread inequality in the income and wealth of the economy’s members. Therefore, the government’s intervention in economic space is very important.

FAQs

Q1. What are the three major functions played by governments in an economy?

Ans. The three major functions played by the economy are the allocation of resources, redistribution of resources, and stabilization of the economy.

Q2. Why should government intervene in the process of allocation of resources?

Ans. The government must intervene in allocation because without its intervention wide inequalities in income and wealth would take place.

Q3. Give one example of the government’s allocation of resources process.

Ans. Allocation of resources may be seen in the government’s policy to subsidize some products and de-subsidize others.

raja
Updated on 13-Oct-2022 11:19:47

Advertisements