The role of government

Government plays a large role in all modern economies. The government sector, which includes federal, state, and local governments, relates to households and firms. The government pays its employees, including elected officials from the president on down, wages and salaries. These wages and salaries join the flow of payments from firms for productive services, and these flows taken together make up total household income. Governments also make transfer payments to individuals without requiring the provision of any service in return. Social security, welfare benefits, and grants to college students are examples of transfer payments. Transfers are not payments for services, as with wages, but are more in the nature of gifts or grants paid to individuals who meet certain qualifications. The work transfer is very descriptive, because these payments transfer money from some households, as taxpayers to other households, who qualify as recipients of the benefits.

The government also affects how goods are produced, for example through the regulations it imposes. Managers of factories and mines must obey safety requirements even where these are costly to implement, firms are prevented from freely polluting the atmosphere and rivers, offices and factories are banned in attractive residential parts of the city.

The role of government (to be continued)

In everyday society governments provide such services as national defense, police, public education, firefighting services and administration of justice. So governments spend part of their revenue on these particular goods and services.

Governments finance their expenditure primarily through taxes collected from households and firms. In the UK the government takes nearly 40 per cent of national income in taxes. By taxing the rich and making transfers to the poor, the government ensures that the poor are allocated more of what is produced and the rich get correspondingly less.

We focus on government for a number of reasons. One is that taxes, government expenditures on goods and on transfers, and government regulations all affect the way private markets work. Markets free of government intervention function well in some respects and function poorly in others.

What ought to be the role of government in the economy? The following economic responsibilities are best fulfilled by government:

• Safeguarding the market system;

• Providing public goods and services;

• Dealing with externalities;

• Assisting those in need;

• Helping specific groups;

• Stabilizing the economy.

The mixed economy

In a mixed economy the government and private sector interact in solving economic problems. The government controls a significant share of output through taxation, transfer payments, and the provision of goods and services such as defense and the police force. It also regulates the extent to which individuals may pursue their own self-interest.

In a mixed economy the government may also be a producer of private goods such as steel or motor cars. Examples of this in the uk include nationalized industries such as steel and coal.

Most countries are mixed economies, though some are close to command economies and others are much nearer the free market economy.

Thus, we consider the economics of a market economy with absolutely minimal governmental interference. In mixed economies, most decisions are made on a decentralized basis market by market, but in every market the government presence is always important to some degree. Most people either pay substantial taxes or enjoy special benefits from tax privileges. Government regulation is everywhere; we need licenses to start businesses and clearances to sell securities that raise funds for financing them. Businesses hire labour, subject to provisions such as minimum wage laws, federal restrictions on hiring foreigners and so forth. The cars we buy have many features required by government safety regulations.

Just as market economies today are really mixed economies, the centrally planned economies do not function entirely on the principles of textbook central planning. In planning economies, central bureaucracies play an extremely important role in determining which goods are produced, in what quantities, and the prices for which they are sold. Nevertheless, market forces familiar to everyone in market economies also play an important role. For example, in many centrally planned economies, farmers work on collective or state farms but also on small private plots of land. Farmers can take the produce grown on private plots to markets and sell it at whatever prices the market will bear. Similar examples appear in market economies.