The major economic functions of the government of an economy are:
- Maintain the Legal and Social Framework
- Maintain Competition
- Provide Public Goods and Services
- Correct for Externalities
- Stabilize the Economy
- Redistribute Income
Although most people agree that the government should play a role in redistributing income in favor of the poor, providing public goods and services, and dealing with externalities, there is significant disagreement about how far the government should go in these areas—and about additional areas for which some people believe the government should be responsible. Some argue that “big government” is already a problem, that the government is doing too much. Others believe that the government sector of the economy is being underfunded and that the government should be given more authority.
The Conservative View
Conservatives believe that the role of the government in the economy should be severely restricted. They believe that excessive reliance on government will undermine economic and political freedom. Furthermore, they question the government’s ability to address social and economic issues. They believe that trusting the government to solve these problems is irrational. They highlight the slowness of government bureaucracy, the difficulty of controlling large government organizations, the problems that political considerations can breed, and the difficulties that arise when people attempt to learn whether government programs are successful or not. Based on these considerations, they argue that the role of the government should be carefully limited. They demand more and better information about what the government can be expected to do (and do well).
The Liberal View
While conservatives frequently question the government’s ability to solve major social and economic problems, liberals frequently question the market’s ability to do so. They point to significant limitations in the market system and argue that the government can do a lot to overcome these limitations. The government can regulate private economic activity by enacting minimum-wage laws, for example. It can also provide goods and services that private businesses do not produce in large enough quantities, such as health care for the poor. Liberals are less concerned than conservatives about the effects of government intervention in the economy on personal freedom when they advocate for such government programs. They are more concerned with the consequences of market activity, claiming, for example, that the price system is unfair because it only awards goods and services to those who can afford them. People who obtain little in the way of goods and services through market activity, in their opinion, are forced to live in poverty. As a result, liberals are more concerned than conservatives about the unequal distribution of income produced by market activity and are more likely to propose government policies aimed at reducing income inequality.
India adopted an economic model that combines elements of both free market capitalism and socialism. Policymakers referred to this as a ‘Mixed Economy’ model. The goal of implementing such a hybrid model was to improve people’s living standards and reduce income inequality. India adopted an economic model that combined free market capitalism with government intervention in critical sectors of the economy. The track record of successive Indian governments in providing social welfare is, at best, mediocre. The government must establish a comprehensive welfare state with a strong emphasis on resource redistribution to the poor, as well as provision of social services (public health, education, equitable institutions, unemployment benefits, old age pensions, etc.) funded through taxation.
In today’s rapidly changing world of high technology, the government must invest heavily in human capital and research and development. On the front of job creation, the government must adopt a prudent mix of labor market institutions, including a fairly flexible labor market that allows for easy hiring and firing of employees, as well as strong labor associations to protect employees’ interests.
Externally, the government must embrace globalisation, trade and investment openness, but with a risk-sharing approach. The government should share the risk of globalization by training and skilling those who have suffered from its negative effects. The risk-sharing process will make globalization acceptable to all.
Adopting the aforementioned features will enable India to achieve high growth while also meeting high social ambitions/indicators.
Functions of Government
Allocation Function
The government provides certain public goods and services that the private sector is unable to provide due to a lack of a market for them. Examples include national defense, public parks, and national highways.
The nature of public goods is the reason for the government providing such goods. By definition, public goods are non-rivalrous and non-excludable. Non-Rivalry means that one person’s consumption of a good does not prevent another person from consuming the same good. The goods are still available to all citizens. Non-Excludability means that the government cannot bar anyone from enjoying the benefits of the good, regardless of whether they pay or not. The goods are inherently non-excludable.
Private Goods: They are natural rivals. Rivalry means that if one person consumes a good, it is no longer available for consumption by another. For example, any private good such as a car, a pen, a mobile handset, etc. If I own a car, that car is not available to anyone else.
They are inherently exclusive. Excludability denotes the possibility of exclusion. If a person does not purchase a metro ticket, he or she may be denied access to the metro train. There is a market for private goods. The existence of a market aids in price discovery, and thus prices for private goods exist, allowing exclusion. Private property rights are well established. If I own a house, I have sole ownership rights to its use. The house is in my name; it is mine. It is not possible to ride for free. A free rider is someone who uses something for which they have not paid.
Public Goods: They have no natural rivalry. Consumption by one person has no effect on consumption by another. For example, if I am driving a car on the highway, that does not prevent another person from driving his or her car on the same highway.
They are inherently non-exclusive. It means that exclusion is impossible. If a public park is built, no one can be denied access to it, regardless of whether he pays the tax/price. There is no market for public goods. As a result, price discovery is impossible. Without a price, the private sector will never supply such goods. As a result, the government must provide such goods. Property rights are undefined. The Highway or a public park is not owned by anyone. They are public goods that must be shared by all. It is not the property of any one person. It is possible to ride for free. For example, suppose the government enacts a law requiring all households to contribute ₹ 100 toward the distribution of Dengue prevention medicine. Regardless, some houses refuse to pay. Because some houses are not paying, the government simply does not allow its prevention program to fail. Because the issue involves a public health risk, the government decides to provide it regardless. As a result, houses that did not pay ₹ 100 will also benefit from the dengue prevention program.
Distribution Function
The government attempts to achieve equitable income distribution in society through its tax and spending policies. Through taxation policy, the government transfers funds from one citizen to another. Pensions for the elderly, for example, or social sector initiatives for the poor. The government provides income support to those who do not have a source of income through these programs. The funds for these programs are raised through progressive taxation, with those with higher incomes paying higher taxes. The goal of distribution is not to rob the rich by forcing them to pay high taxes or to discourage people from earning more money, but to make a fair redistribution that benefits everyone.
Consider the following: rich people’s per capita consumption of common resources will be higher than poor people’s (who survives on bare necessities). As a result, they must pay a higher price for its availability. On the road, an SUV or Sedan takes up significantly more space than a bicycle. As a result, the SUV owner must pay a higher price/tax for road construction than the bicycle owner. The preceding example demonstrated the concept of progressive taxation. Similarly, old age pensions are not government grants, but rather the right of those who have worked tirelessly during their productive years. As a result, the government must look after them by providing them with old-age benefits.
Stabilization Function
The economy is prone to periods of insecurity and fluctuation. Periods of fluctuation necessitate the government taking an active role in removing them. The Global Financial Crisis occurred in 2008-09. The GFC reduced the rate of GDP growth as well as employment. The government provided a Fiscal Stimulus package for the industry to help the economy recover from the GFC.
In a similar vein, when consumer spending exceeds producer willingness to supply, the economy may overshoot occasionally and consumption exceeds output. Inflation happens. To remove inflationary pressure from the economy, the government intervenes through tight fiscal policy.