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Role of Government in the Economy MBS First Year

Role of Government in the Economy MBS First Year

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Published by Store Sansar

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Published by: Store Sansar on Sep 08, 2010
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Role of Government in the Economy
Government is an institution which plays an important role in all types of economicsystem.The role of government in all types of economic system is very essential in presentsituation. By using its power, government can enact the law to regulate differenteconomic activities. The Government intervenes, the activities of private firm byusing various specific policies, such as industrial policy, commercial policy, labour policy, environment policy etc.In primitive societies, the government role was neglected. They believed that thegovernment is best which governed least. They preferred the minimum role of government. Their economic ideas were based on laissez-fair doctrine, whichmeans the system of economic liberty. In nineteen century in England "thatgovernment was considered the best which does the least". Due to thisgovernment control and the role in the economy had declined.In laissez-fair economy there was rapid economic growth and on the other theevils, such as unequal distribution of income and wealth, monopolistic exploitation,exploitation of unskilled labour. Consequently, the role of government again beganto increase all over the world. After World War I, Russian revolution which lead tothe abolition most private property and put state in control through central planningof all economic activities. During the period of 1929 – 33, there occurred GreatDepression in the capitalist countries which caused huge unemployment of labour and other resources in those countries and as a result level of national income felldown. Due to depression many factories were closed and factories which wereworking were also not being used to their full productive capacity. As a result,unemployment, low income, low production was created. Since World War II mostof the economists had taken increasing public sector as the natural and essentialfactor of development. The objectives like economic efficiency, growth,macroeconomic stability, poverty alleviation, equal distribution of income, provisionof public of goods cannot be achieved only through private agencies. During theperiod of 1967s there was re-emergence of private interest views in public sector.In this way controversy about the role of government has not subsided. Manyresearch has been made regarding government involvement has hindered or facilitate in economic sector.The Government, Culture and Geography, Environment and Natural Resources aretaken as the basic pillars of economic growth. Economists point out the need for government’s role mainly due to the market failure. It is therefore government’s roleis important in the economy mainly because of the following reasons:a) Providing public goods such as rule of law, effective regulation anddevelopment of physical infrastructure.b) Managing positive externalities such as those emanating from theinvestment in education, health, and research, and the negative ones suchas the effect of the pollution.c) Controlling and monitoring monopoly, andd) Managing the coordination failure occurring in the private sector 
A number of world economies that were at the same level with their neighbouringeconomies in terms of education, health, per capita income and natural resourcessome five decades ago, have been successful in attaining significantly higher levelof economic development because of the government’s role. Countries like SriLanka, Botswana, China, and South Africa have proved that significant progresscould be achieved even in a short period mainly due to the qualitativeimprovements in and effectiveness of the government's role. The HumanDevelopment Report 2003 highlights that Sri Lanka had increased life expectancyof her people from 46 years to 58 years during 1946 to 1953. Botswana was ableto increase the primary school enrolment rate from 46 percent to 89 percent during1970 through 1985. China successfully reduced the poverty rate from 33 percent to18 percent in the decade of 1990s. And South Africa was able to reduce thenumber of people lacking access to clean drinking water from 15 million to 7 milliononly in a period of 4 years during 1997 through 2001. In the background of thesetheories and instances, Nepal’s need of the hour is to develop a far-sighted visionto ensure an effective state mechanism, even taking into account the experiencesof other economies, that facilitates in attaining higher level of economic growth.
Source: David N. Weil, Economic Growth (2005) and UNDP Human Development Report (2003)
According to World Bank Report, 1988, government was involvement mainly onpublic goods, defence, diplomacy, macroeconomic management, justice, legalmatters and infrastructure like social, physical, education, health, transportation,and environment protection.
Regulatory and Promotional Role of the Government
Any country's the prosperity and obstacles of economic growth results fromactivities of government. That means, government plays important role in economicactivities. In free market economies government plays important activities. It has toperform role to prevent market failure. As we know that market does not yieldeconomically efficient outcome every time as the result market fails to operate. Infree market economy government has designed activities to stimulate and assistprivate enterprise and to regulate or control business practices so that their operations are consistent with the public interest. There are various forms of government regulation especially to regulate the activities of private firms.a) Industrial products are subject to operating regulations, governing plant andpollutant emission, product packaging and labelling, worker safety and healthetc.b) Financial Regulations; Banks and Financial Institutions are subject to both thegovernment as well as the control made by the Central Bank for financialsoundness.
A. Rational for Regulation
1) Economic Consideration; and2) Political Consideration
1. Economic Consideration
Economic consideration is related to the cost and efficiency implications of variousregulatory methods. From economic view point a given mode of regulation or change in regulatory policy is desirable to the extent that benefit exceeds the cost.Political consideration relate to equity rather than efficiency.Economic consideration has an important role in formulating regulatory policy. Infact, it is due to market imperfection that need of regulation in production andmarketing activities was felt. If unregulated, the market activities itself createsinefficiency or waste and market failure.Market failure is mainly two types
Failure by market structure
In order to achieve the economically efficient outcome there must be manyproducers and consumers within each market. This condition is unfulfilled in somemarket such as water power, telecommunication etc. If these sectors are allowedfor private sectors natural monopoly situation come to exist. They may exploit theconsumers by charging higher prices and reduces the volume of output and earnexcessive profit. Under such situation market does not yield economically efficientoutcomes and creates the situation of market failure.
Failure by incentive
Second kind of market failure is due to lack of incentive. The market failure due topresence of externalities is known as incentive failure. Production of the firms andconsumption of individuals are interdependent of each other. Differences betweensocial and private costs or benefit are called externality. Pollution caused in thewater supply in the lower part of the city by the carpet factory situated in the upper part of the city and Plantation of trees in the certain part of the community benefitsthe community as a whole are the examples of negative and positive externalities.
2. Political Consideration
In formulating regulatory policy, political manifesto of the ruling party and theopposition parties needs to be taken into consideration for political consensus andcommitments. From political viewpoint there are two reasons for regulation:

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