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Role of Government in Market Economy

In a market economy, the government has a role. The government gives specific goods and services that are funded by taxes, such as military defense, environmental protection, and property rights protection. The government is also responsible for providing services that the private sector is unwilling or cannot offer.

Governments may control some enterprises while supporting others through subsidies. Governments also impose taxes on their residents and transfer the proceeds to the needy, including the senior population.

Let us study the role of government in the market economy as defined by Samuelson and other modern economists. According to them, governments have four primary roles in a market economy.

  1. Increase effi­ciency.
  2. Provide infrastructure.
  3. Promote equity.
  4. Encourage macroeconomic growth and stability.

Increase Effi­ciency

In order to ensure that the economic system operates well, the government must make an effort to address market imperfections like monopolies and excessive pollution. Externalities, often known as social expenses, occur when companies or individuals impose costs or benefits on others outside of the marketplace.

Provide Infrastructure

The government should establish an interconnected infrastructure.
Infrastructure is referred to as the fundamental physical structure of an enterprise, region, or country. It commonly relates to the production of publicly available goods or production methods.

The term “infrastructure” describes actions that either directly or indirectly increase output or production efficiency.

The below listed actions should be covered by the government due to the extremely high cost of delivering these fundamental services and the advantages they confer on multiple separate groups.

  • Transport systems
  • Electricity generation
  • Telecommunication and banking
  • Education and medical facilities
  • A well-functioning form of governance
  • Politically stable system

Promote Equity

Markets aren’t always able to provide an income distribution that is considered socially fair or equitable. The market economy might result in unacceptable levels of income inequality. Taxation and spending are used by governments to re-allocate money to specific groups in order to advance equity.

What Does Economic Equity Mean? Click HERE

Encourage Macroeconomic Growth and Stability

Taxation, spending, and monetary policy are all used by governments to promote macroeconomic growth and stability. This is to decrease unemployment and inflation while boosting economic growth. Fiscal and monetary policies are both parts of the macroeconomic framework for growth in the economy and stabilization.

Are you interested in learning more about ‘Economic Growth and Development‘? Click HERE.

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