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 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 −
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 −
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 −
Some of the examples of means through which aims of distribution functions are achieved include the following −
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.
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 −
Regarding the stabilization function, the government policies have two major components −
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.
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.
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.
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