Role of Government in the Economy - Essay Example

Roles of Government in the Economy Government and the economy are two integral attributes of any given country that are characterized by a strong relationship between them. The role of the government in the growth and development of the economy cannot be overestimated. The government plays a central role in the planning of activities in all the sectors of the economy. Any given economy is influenced by allocation of resources, which are hereby considered scarce and spread over an endless list of activities.

The effectiveness of the economy in terms of performance is an important determinant of the growth and development that characterize all the sectors of economy in the country (Wildavsky, 2009). In this regard, evaluating, assessing and identifying the roles performed by the government in the economy are important in the understanding of the relationship between the former and the latter. Producers and consumers are regarded the key drivers of the activities and performance of an economy. However, the influence of the government on the decisions made by the two parties cannot be ignored.

Government activities and decisions on consumption, expenditure, investment and foreign trade greatly affect the direction that the economy takes, not only in the United States but also in the rest of the world. Government and the economy interact in a number of ways. These ways provide the mechanism through which the government plays its roles in the economy. One such role is stabilization and growth implemented in economic system. The federal government influences the pace at which the economic activities take place.

It attempts to achieve a steady growth in the economy, alongside maintaining high levels of the employed population. On the same note, it attempts to maintain a stable price level in order to minimize occurrence of inflation. Inflation derails the positive course of the economy. Fiscal and monetary policies are the two fundamental tools used by the government in playing its stabilization and growth realization role (Harlan, 1999). This role is not without challenges. From time to time, the US economy, alongside that of the entire world, has been characterized by poor performance of economic sectors, as well as the failure to regulate inflation and depressions in the business cycle.

At times of recession and depression, the government must arise to secure the welfare and performance of the economy. Government efforts during such difficult times include increasing spending and cutting on the taxes charged upon the population. This mobilizes consumers to demand more of goods and services, thereby accelerating money supply. On the other hand, in times of an increased general price level the government must intervene. The most common action taken by the government is limiting spending, so that money supply reduces.

Regulation and control is the other role played by the government in the economy (Wildavsky, 2009). The main idea in regulation and controlling is based on private-public enterprise interactions and relationships. The activities of the private enterprises are monitored by the government in terms of the way they conduct business. This action is aimed at safeguarding the interests and welfare of the consumers. Unlike public enterprises, which can make huge investments with an expectation of high or low returns, the private enterprises are profit-oriented.

They invest in the fields with high returns, favorable costs and minimal risks. Due to this aspect of private enterprises, the government monitors their activities in regard to the way they treat the consumers. Another aspect of regulation and control is exercised on monopoly firms. Entry into a monopoly market is characterized by substantial barriers, making one or just a few firms dominate the entire market. Monopolistic firms are price makers. They determine what price to charge and what quantity to produce.

As a result, they are associated with inefficiencies and social welfare loss. In this regard, the government comes in to regulate their activities, ensuring that they make normal profits b charging the consumers reasonable prices for the goods and prices they offer to the market. Public health, safety and environmental concerns are other issues that necessitate regulation and control of producing and manufacturing firms because many of these firms are often unaware of these issues. The government undertakes provision of direct services, as well as direct assistance to the individual components of the economy.

As identified earlier, the government is the central planning unit of the economy. This role is undertaken by various legal ministries and government departments (Courtenay, 2008). For instance, it is the role of the federal government to provide national defense for the entire American community. It is important to note that the stability of the economy is strongly based on the security of the country. Countries characterized by wars and political instability have poorly performing economies, thereby depicting the necessity of national security in the economic context.

Research-based development of goods and services is also aided by the government through the respective units of governance. On the other hand, direct assistance occurs in the context of production and manufacturing. Direct support is experienced in the subsidization of business and economic activities. Cutting on the production costs ensures that the firms can produce more and consequently charge favorable prices to the consumers. Increased growth and development in production and consumption foster an accelerated pace of economic growth and development.

Other aspects of this role include favorable interests rates initiated by the government, technical support to individuals and businesses, as well as the provision of credit facilities to producers and manufacturers to encourage higher production capacities. On the same note, facilitating exports and advocating for minimal barriers in importation favors the performance of economy. Inequality and presence of poverty in any given economy are not favorable for economic progress. In the US, for example, the present economic system is considered to perform well.

However, many parts of the country are characterized by poverty. Although the government has formulated and implemented anti-poverty policies and efforts, the problem has not been addressed entirely. Significant progress has been achieved, but this still remains a critical issue. The economic system by itself cannot address matters of employment, unemployment and price stability. It is important to note that these factors influence economic growth and development greatly. The government comes in as an economic unit to create more jobs in the labor market and further negotiate higher wages for the labor force in order to reduce, if not alleviate, poverty.

The government undertakes wealth and resource redistribution for the purposes of equality. Different sectors of the economy accumulate funds and resources at different paces. Individuals, business enterprises and firms do the same. Variations in income, asset control and profits made by these components of the economy need to be harmonized (Denny, 2006). In a bid to do so, the government employs a number of mechanisms. The most common mechanism employed is the use of taxes. Consumers and producers are required to pay taxes relative to their ability to pay.

Taxes collected are used in the provision of public goods and services. Individuals and businesses with high levels of incomes or profits pay high taxes. On the other hand, those with a lower ability to pay are charged lesser taxes. Wealth and resource redistribution is achieved when the taxes collected by the government are channeled back into the production and provision of consumer goods by the government. Public goods and services are provided by the government due to the aspect of externalities associated with such goods.

Some benefits or costs associated with these goods or services are not reflected in the market price. As a result, they offer no incentive to produce them. Since the government is concerned with the welfare of the society, it therefore makes such investments, productions and supplies of these goods and services, because the private sector cannot find it profitable to do so. Another aspect of wealth redistribution is observed when the government makes transfers to the less income earners (Courtenay, 2008).

The funds transferred to these individuals and groups of the society are obtained from the high earning individuals and groups in the same economic system. This role aims at balancing wealth among the components of an economy in order to ensure that there are no extreme cases of wealth or poverty. From the above discussion of the roles of government in the economy, it is evident that the two are strongly related. Each and every activity or decision made by the government influences the direction of the economy.

Economic performance therefore largely depends on the government. The realized economic growth and development are determined by the government. The government can trigger low to high rates of economic growth and development, based on the decisions and policies it adopts in the context of economic welfare. References Courtenay, S. et al. (2008). Measuring the government sector of the U.S. economic accounts. Chicago: National Academies Press. Denny, J. (2006). The role of government in economy and business.

California: PT LKiS Pelangi Aksara. Harlan, M. (1999). Understanding economics. New York: M.E. Sharpe. Wildavsky, A. et al. (2009). The Federal budget: economics and politics. New York: Transaction Publishers. Notes The government and the economy are strongly correlated. The activities of the government by greater margin influence the economic position. Government undertakes several roles in the economy, among them stabilization and growth, regulation and control, wealth redistribution, production and provisions of public goods.

The government provides public goods since they cannot be offered through the market due to the problem of externalities. Economic growth and development largely depend on the decisions made by the government. The government therefore sets the pace for economic growth and development.