The Main Functions of a Government in a Market Economy

Published: 2021-09-14 10:55:10
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A market economy is when the demand and supply forces in the market are allowed to operate in freely, hence free flow of goods and services. What makes a market economy different from a Pure Market Economy is that there exists a certain level of government control in a market economy. A pure market where the forces of demand and supply are perfect, can not exist. An economy needs government intervention.
A very popular Indian comedian, Kunal Kamra said in one of his sets that the government is basically a service provider. We pay them in form of taxes and therefore should be provided the goods and services which are rightfully ours.One of the prime functions that the government performs is that of providing a strong legal structure, a backbone for the economy. Making legal amendments, introducing reforms and schemes, sorting out property rights and in economic terms proper allocation of scarce land and resources.
Almost three decades ago in 1990, Radheshyam, 49, was given half an acre of farm land free,in Manipuri district of UP, taken away from a landlord as part of what was then a 40-year-old state law that allowed distribution of such land to the poor. For the next five years, Radheshyam grew food grains on his half acre, which yielded about eight quintals of rice year. In 1995, a nearby pond flooded his land. Since then, Radheshyam moved to Agra, and worked whatever job he could find. Steeped in debt, land provided to him under Reforms Act, 1950, was too little to change his life. Radheshyam’s situation reflects the failure of a 54-year-old Indian programme to take land from the rich and give it to the poor. The Indian government has failed time and again in building a safe and systematic legal structure for a sector were one third of their economy is employed.
In recent news though, was the Fugitive Economic Offender Bill, 2018. The fugitive economic offenders bill, 2018 will become law after the President’s assent and will empower the government to seize both local and overseas assets of alleged offenders, such as Vijay Mallya, Nirav Modi and Mehul Choksi, who chose not to return to India to face the law even after arrest warrants were issued.
Another major role of the government is to provide goods that individual or private businesses would not provide.
One of these prime services is Defence. Everyone is equally protected by say the Indian national defence system. My consumption of this service does not exclude others’ consumption. It is a public service provided by government and paid for by taxes. Any private organisation doesn’t have any share in the defence of our country and all major defence related decisions are taken exclusively by our government.
Another major example of a public service, which for a long time wasn’t tapped by private corporates, is that of public transport. Be it in India, or around the world, the Taxi, bus, trams, metros etc were always run by the state. However a major cause of privatisation of this sector by the intrusion of Uber, Ola and other joint ventures is the gradual decrease in the quality of service provided. This not only includes the trodden down conditions of the local buses and trains in India or the questionable safety of the state sponsored taxi services in India only, it’s a global phenomenon distressing countries like France and Brazil as well. But the fact that there now exists a large market for services like private sector companies now like Uber and Ola highlights the fact that government is not able to fulfil its function of providing goods and services to its tax paying costumers or citizens.
Reducing unemployment and inflation to promote economic growth.
Judicious and Optimum utilisation of resources, natural, capital or human is one of the main functions of the government in a market economy.
In 1969, the incoming conservative government in UK inherited a failed market economy. With falling output, rising unemployment and a fall in the inflation rate, the recession particularly hit manufacturing sector. To reduce the inflation, the government raised the interest rates, tightened the monetary policies, increased taxes, reduced government spending and basically controlled money supply. Because of these measures the aggregate demand automatically reduced and the exchange rate increased.
On the contrary is the island nation of Madagascar. Since 2014, the World Bank has been supporting the country’s efforts to speed up the land reform process through two programs, the Emergency Food Security and Social Protection Project (PURSAPS) and the Agriculture Rural Growth and Land Management Project (CASEF). PURSAPS involves the issuance of land certificates to more than 50,000 unemployed farmers. CASEF, launched in September 2016, aims to provide secure title to 500,000 parcels in 180 communes. The success that Madagascar has had can be credited to several factors, first and foremost the local government which ensured transparency, accountability and community participation.
The progressivity of the tax system is an important indicator of the market economy. Another important indicator is given by the total amount of resources redistributed by the government in each country.
For example, Brazil is one of the 10 largest economies in the world, but also one of the most unequal. The Brazilian tax system has aggravated the problem by placing a heavier fiscal burden on the poor and the working class and extending tax breaks to the wealthy. The constitution also says that a consumer must be informed of taxes levied on goods and services, and yet the “indirect” production taxes (which are placed on producers who usually pass along the cost to consumers) means that taxes are practically invisible to most Brazilians. The very unjust tax regime of the government, the failure of performing the function equitable income redistribution is what is probably preventing Brazil to move in the list.
Even considering the largest economy in the world, Americans are not known for their love of income redistribution. The US government’s tax structure is a progressive tax system. Yet it can be observed that it doesn’t redistribute the income which it acquires from the rich. It ends up pulling only half of the Robin Hood trick, taking from the rich but not quite distributing to the poor. So while on the face of it we see the dynamic US economy, it fails to provide income stability to its poor.

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