MICROECONOMICS DECISION

MAKERS
THE ROLE OF THE GOVERNMENT AS AN EMPLOYER AND PRODUCER

The public sector owns and operates many industries and goods and services are produced by
natural monopoly. They produce goods and services that private sector may underproduce or
not produce at all.

Natural monopoly is a situation where one firm can supply the market at a lower cost than 2 or
more firms due to the existence of economies of scale and avoid wasteful duplication of
resources. Long run average cost is used if there is a single firm.
For example : Gas,electricity,railways
Many firms may result as wasteful duplication of resources and customer exploitation.

Merit goods - Merit goods are goods that the government produces for the benefit of consumers
and the society at large. For example : Education, healthcare, free transport fees for students.
Merit goods are undervalued and thus,it can be underproduced or underconsumed if left to
market forces.
Government believes that everybody should consume it whether they can afford it or not.

The government attempts to increase the consumption of merit goods and services and for this,
the government pays private sector to provide them and they are provided free of charge,
provide the benefits of consuming the item and in some cases, made it compulsory.

Public goods
Non rival : If one person consumes the item, it does not reduce the ability for others to use it as
it will never run out. For example :clean air
Non excludabilty : It is not possible to stop non payers to enjoy it. For example : Street lighting

Public expenditure and revenue

Mixed economy is an economy that contains public and private sectors which are controlled by
the government and private shareholders.
Public finance are financial activities of public sector and it is divided in two parts that are
Revenue and Expenditure.
The government gets revenue and expenditure is the spending of central government local
authorities and lend to public cooperation.
Public expenditure :
1. Capital expenditure : It is expenditure on long term capital projects and commonly
financial by borrowing than taxation. For example : Construction of infrastructure

2. Current expenditure : Spending on goods and services which are necessary to operate
public services from day to day. For example : Payment of public worker salary

3. Transfer payment : payment to old age pensions and also these payments are not made
in return to goods and services. For example : Unemployment benefit

Main sources of revenue to the

government are :
1. Taxation - From direct and indirect taxes
2. Rent - Receive rent from state owned land and buildings
3. Profits - By state owned enterprise
4. Interest payment of loans made by the borrower
5. Sales of government owned industries which means privatisation
6. Motorvehicle liscenses, Passport fees,gun liscenses