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Running head: GOVERNMENT ROLE IN THE ECONOMY 1

GOVERNMENT ROLE IN THE ECONOMY 6

Government Role in the Economy

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Introduction

The government in every country takes some steps which are meant to ensure that they enhance economic performance. It can be in the form of full employment, price stability, or regulating business activities. The United States government for example is involved in enhancing economic performance by using the monetary policy and the fiscal policy. The main aim is to ensure that there is a good environment for the functioning of the businesses while at the same time taking care of the needs of the people (Fletcher, Pforr&Brueckner, 2016). Therefore, letting the market forces take the play to determine the economic performance leaves the economy vulnerable and too much regulation hinders performance. Therefore, the government is involved in the economy on various levels. Some of the factors that determine the involvement of any government include the current welfare economics and market efficiency, the externalities, and the environment as well as the differences between public and private goods in the economy.

Welfare Economics and Market Efficiency

The government is supposed to enhance efficiency in the economy. However, this can happen by either getting involved with the decisions or directly engaging in other activities. The main aim is to remove inefficiency (Hasan&Salleh, 2018). The inefficient markets are one of the factors determining the government involvement in the economy. Inefficient markets experience disequilibrium in the allocation of resources. Therefore, in such a market, the government will choose to be involved.

The first reason for intervening is to maximize social welfare. When the economy remains unregulated by the governments, some other players such as the cartels take over and they engage in monopolistic power. The effect is that the cost of entering the market as well as the development of infrastructure is increased. Diminished resources, a stiffening of the innovation as well as minimization of trade are all the results of such an approach. When such factors are present in the economy, the government chooses to intervene and regulate such issues to bring a balance in the economy (Hasan&Salleh, 2018). The equal distribution of resources is one thing that shows proper government involvement.

The government also gets involved in the economy due to some macro-economic factors. This is where the government seeks to minimize the damages that have been caused by naturally occurring economic events. These are factors such as inflation or recessions. These are events that negatively impact the economy and hence causing devastating impacts (Gill et al., 2017). Through such methods as providing subsidies or the manipulation of the supply of money, the governments work to minimize the negative impact on the economic forces.

In a situation where the market is unfair, the governments may seek to be involved to enhance economic fairness. Through activities such as taxation and welfare programs, the governments try to delocalize the wealth from those who are wealthy to those who are in need (Triguero, Álvarez-Aledo &Cuerva, 2016). Therefore, socio-economic policies make the government to get involved in the economy. Factors such as unemployment levels or a problem affecting a particular segment of the population make the government to be involved in the economy to enhance market efficiency.

Externalities and the Environment

The environmental externalities refer to the uncompensated environmental effects of production as well as consumption. These are factors that affect the utility of the consumer and the cost. Negative externalities result to lower private costs compared to the social cost. The fact that the production activities of businesses and firms impact the environment makes it logical for the governments to participate in the economy. This is because when the costs of production are made, the social costs such as those of polluting the water sources are not accounted for.

In cases of negative externalities and the environment, the government intervenes to bring the necessary help and to overcome these negative challenges. One of the ways the government helps to overcome the externalities includes introducing regulations (Hasan&Salleh, 2018). These can be in the form of outlawing a particular activity or giving measures that can be adhered to and make the environment safer for the people. At the same time, the government can use market solutions. Policies such as pollution penalties and levying environmental taxes are some of the measures the governments use to enhance responsibility on the part of the businesses. These regulations target to recover funds for fixing the damages. The firms, therefore, work to produce products that do not have high social costs.

Public and Private Goods

The public goods are those that are available to every person by the virtue of being availed by the government or nature. On the other hand, private goods are those provided by private companies to satisfy the needs of the consumers (Mmbando, &Baiyegunhi, 2016). In an instance where the government is not involved in the regulation, there are many instances of private goods in the economy. This gives rise to cartels which increase prices without considering the final consumer. As a result, aspects such as the cost of living go high. Therefore, the government engages in the operations of the economy to ensure that there are public goods that meet the need of the people. These create room for competition in the market and hence the private goods can be priced well.

The government must make decisions to allocate x dollars to a particular project as opposed to another. In this case, some of the first basis that the government should use should be to determine the social cost of the project. When it causes more harm to the people, irrespective of the profits and the returns then such a project requires less consideration(Wei, 2017). The same case occurs when the project negatively impacts the environment. The second consideration is the benefits of the project in enhancing the distribution of wealth. Some projects are focused on profit-making as opposed to enhancing the lives of the people. The benefits of a project should be seen and felt by the people.

The governments ensure that the economy is productive for producers and consumers. Through laws and regulations, the government understands the projects that are more valuable than others. Those with greater benefits such as enhancing the quality of life of the population should be given the funds (Wei, 2017). This is because the government is not after great profits but rather the welfare of its people.

Conclusion

In conclusion, governments are involved in economy operations in one way or the other. The lack of government intervention sees a rise in monopolies that exploit the consumers. The governments also play an important part after hard economic times such as recession and inflation. The decision to allocate resources, therefore, should be based on the benefits that come with it. The society and the impacts on the environment should be considered. At the same time, the government must consider the long-term impacts of a project because as time passes the impacts may vary.

References

Fletcher, C., Pforr, C., &Brueckner, M. (2016). Factors influencing Indigenous engagement in tourism development: an international perspective. Journal of Sustainable Tourism, 24(8-9), 1100-1120.

Gill, B., Webb, J., Stott, K., Cheng, X., Wilkinson, R., & Cossens, B. (2017). Economic, social, and resource management factors influencing groundwater trade: Evidence from Victoria, Australia. Journal of Hydrology, 550, 253-267.

Hasan, M., &Salleh, D. (2018). Identify factors influencing and barriers to the adoption of the Private Finance Initiative in local government in Malaysia. International Journal, 3(9), 69-82.

Mmbando, F. E., &Baiyegunhi, L. J. (2016). Socio-economic and institutional factors influencing adoption of improved maize varieties in Hai District, Tanzania. Journal of Human Ecology, 53(1), 49-56.

Triguero, A., Álvarez-Aledo, C., &Cuerva, M. C. (2016). Factors influencing willingness to accept different waste management policies: empirical evidence from the European Union. Journal of cleaner production, 138, 38-46.

Wei, Q. (2017). From direct involvement to indirect control? A multilevel analysis of factors influencing Chinese foundations’ capacity for resource mobilization. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 1-17.