Wednesday, May 18, 2011

What are the different view points about the role of the government in an economy?

What are the different view points about the role of the government
in an economy?

Answer. While consumers and producers make most decisions that mold the
economy, government activities have a powerful effect on the economy. The
government plays important role in all economies of the world. Normally the
government plays the following roles.
Stabilization and Growth
Perhaps most importantly, the government guides the overall pace of economic
activity, attempting to maintain steady growth, high levels of employment, and
price stability. By adjusting spending and tax rates (fiscal policy) or managing the
money supply and controlling the use of credit (monetary policy), it can slow
down or speed up the economy's rate of growth -- in the process, affecting the
level of prices and employment.
Regulation and Control
Private enterprises may indulge in various unfair practices like, misleading
advertisements, price discrimination, formation of cartels, and so on, in the
absence of perfect competition. The government regulates private enterprise in
numerous ways. Regulation falls into two general categories. Economic
regulation seeks, either directly or indirectly, to control prices. Traditionally, the
government has sought to prevent monopolies from raising prices beyond the
level that would ensure them reasonable profits. At times, the government has
extended economic control to other kinds of industries as well.
Government also exercises control over private companies to achieve social
goals, such as protecting the public's health and safety or maintaining a clean
and healthy environment. The Food and Drug Administration bans harmful drugs,
for example; the Safety and Health Administration protects workers from hazards
they may encounter in their jobs; and the Environmental Protection Agency
seeks to control water and air pollution.
Direct Services and Direct Assistance
Direct Services. Each level of government provides many direct services. The
federal government, for example, is responsible for national defense, backs
research that often leads to the development of new products, conducts space
exploration, and runs numerous programs designed to help workers develop
workplace skills and find jobs. Government spending has a significant effect on
local and regional economies -- and even on the overall pace of economic
State governments, meanwhile, are responsible for the construction and
maintenance of most highways. State, county, or city governments play the
leading role in financing and operating public schools. Local governments are
primarily responsible for police and fire protection. Government spending in each
of these areas can also affect local and regional economies, although federal
decisions generally have the greatest economic impact.
Direct Assistance
Government also provides many kinds of help to businesses and individuals. It
offers low-interest loans and technical assistance to small businesses, and it
provides loans to help students attend college. Government-sponsored
enterprises buy home mortgages from lenders and turn them into securities that
can be bought and sold by investors, thereby encouraging home lending.
Government also actively promotes exports and seeks to prevent foreign
countries from maintaining trade barriers that restrict imports.
Government supports individuals who cannot adequately care for themselves.
The Medicare program pays for many of the medical costs of the elderly. The
Medicaid program finances medical care for low-income families. In many states,
government maintains institutions for the mentally ill or people with severe
disabilities. The government provides Food Stamps to help poor families obtain
food, and the federal and state governments jointly provide welfare grants to
support low-income parents with children.
Government in most countries is an entrepreneur also. There are many areas
where profits are low, or gestation period of initial investment is long (as in
infrastructure projects) and returns come after a long time, or it is difficult to
charge to charge an exclusive price from different buyers and thus private sector
is not willing to come forward to invest in these areas. Therefore, government
undertakes investments in these areas.
In India at the time of independence private sector neither had funds nor enough
skilled manpower to invest in these areas and so these became the responsibility
of the government. Besides, there are areas of strategic importance, which
cannot be left to the private sector like, defense, and so the government may be
the sole producer of defense goods.
The government promotes business and economic activity for employment
generation. The government is taking the right steps to provide an atmosphere
conducive to innovation and entrepreneurial ventures. Even in India's recent
history, the government has offered incentives such as tax breaks, subsidies,
and small venture capital funds to assist with entrepreneurship. In addition, the
Indian government established the Technology Institutes that are now some of
the most prestigious in the world.
In modern times with increasing global competition and increasing political
pressures, even in private enterprise economies all decisions pertaining to, what
to produce, how to produce, for whom to produce, cannot be left entirely to
private sector, more so for developing economies.
The government ahs to plan the total economic activity in terms of production in
various sector, resource allocation, generation of incomes, borrowings and debt
management, imports and exports, and so on.
In India planning is done by way of five-year plans.

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