Public Goods And Role Of Government Essay
The belief that the role of government is only limited to ensure proper functioning of the market economy and not providing goods and services is incorrect. In fact, this is the most common economic myth that still prevails in the mind of many individuals as they believe the market economy which is also known as free market economy is natural and the role of Government is only to enforce the necessary rules and regulations which somehow are only meant to interfere with beneficial working of the market. However, before explaining that why market is not God and why Government is not Devil and how the Government also provides goods and services to the consumers, it is necessary that we understand as what constitutes the features of a market economy:
All resources are owned by the private resources and economic activities are carried out with the objective of profit maximization.
Producers are free to decide as what to produce, how to produce and for whom to produce. On the other side, consumers are free to choose what they want to purchase. Thus, the prices of goods and services are decided by the process of price mechanism, i.e. through forces of demand and supply.
Government will make no interference in the business activities unless business decisions are in the disinterest of the society.
With the above features discussed, one could infer that yes, Government only make rules and regulations to ensure proper functioning of the market economy. From a very brief discussion above, till now we have come to know that in market economy, Government do have a large impact over the businesses through its power to regulate the laws associated with business. Thus, before we move ahead and evaluate how government also provides goods and services to its citizens, we discuss, as how Government regulation affects the businesses:
Any regulation by the Government forces can prove to be a market catalyst and can also change the social behavior in the business environment. For example, although the private producers are free to decide what to produce, Government by levying heavy taxes on businesses that use carbon fuels and providing subsidy to businesses using renewable energy, can actually change the whole business scenario of each of the industry. Similarly, in order to promote any industry such as Small Scale Industry, etc., Government forces can announce tax exemptions which can prove a boon for the industry participants.
In this way, any action by the Government can prove to be a game changer for any businesses.
Government regulations can also influence the interest rates in the country which directly or we should say pre-dominantly affects the cost of borrowing for the business community. For Instance, if Government forces decide to print more money citing recessionary trend in the economy. This may be accompanied with low interest rates which foster borrowing by business houses and also increased consumer spending which will benefit the businesses all together.
On the other side, at the time of inflation, higher interest rates produce negative results for the businesses.
However, in reality, Government has a far more expanded role to play rather the market economy is very much a product of government activities. One such role that Government plays in ensuring proper functioning of the market economy is providing goods and services. However, the role of government providing goods and services is only limited to Public Goods. Public Goods are those goods that are non-rivalry in consumption, i.e. consumption by one individual does not affect the availability to other. By nature, public goods are made for benefit of every individual simultaneously. Thus, consumption of public good does not impose opportunity cost on others. Thus, any number of people can enjoy the benefit of the public good at the same time too. This is the reason many economist also calls public goods as ‘Non-Excludable Goods’.
The best example to illustrate public good will be providing the citizens of the nation with the services of defense forces. Every individual in the nation is protected from foreign invasion by the combined military forces of our country. These military forces are provider of defense services and these services are made available to us by the Government itself not the private participants of the market economy. More to the point, if I am being protected through the defense services, so are you. Thus, consumption of national defense does not impose an opportunity cost on anyone else.
Thus, with non-rival consumption nature of the public good, market efficiency could only be achieved if these goods are produced by the Government as it is only then everyone in the society will be allowed to consume the good. It is important to note that in the market economy or any other too; it will be impossible or largely difficult for the private forces to produce public goods and even if they do so, it will be obstacle to market efficiency as such goods will be available for price and price is the factor that will obstruct the non-rival consumption.
Similarly, Public goods are also characterized by the inability to exclude nonpayers from gaining ownership and control. In other words, no one is excluded from consumption as these goods cannot have a well-defined property rights. Hence, with nonpayer non-excludability, public goods cannot be exchanged through markets and if private producer are allowed to produce such goods, they will under-produce the good because of free-rider problem associated with the public goods.
It is important to note that production of public goods such as providing defense services, public lawns, etc., also cost a lot to the government and in order to finance the same, Government resort to general tax revenues(that are unrelated to consumption) for providing public goods and services to the people.
Thus, it is only Government not the participants of the market economy which can provide the people with public goods and services as production of such goods cannot be dealt with profit motive of an individual and even if any private producer seek to produce such goods and sell in the society, the business will surely fail because of the non-exclusion of any person from consuming such goods even if he don’t pay for it. In this way, Government by providing public goods and services to its citizens ensures economic equity which is very essence of the market economy itself.
At the end, we can see that the Government function is not only to ensure efficient functioning of the market economy but by providing public goods, it not satisfy the need of its citizens but also ensure economic efficiency which by just relying on private forces could never be realized. We also came to know that there is a necessary relationship between the market forces and the organizations without which market efficiency could not be achieved.
It is important to note that, Market forces describe the interaction between supply and demand within a market and organizational response is the reaction of business houses to an economical or business circumstance. The response of the business house to the market forces carries great significance as it has a direct impact on the profit potential and going concern objective of the company. In a simple way, a company will conduct the market research and will try to forecast as what product or service is being awaited by the market and not just by simply putting the product in the market without adopting them to the market forces. Hence, if a company has judged that the product they are producing is as per the needs of the customers then it will be easier for the company to keep their customers happy just by ensuring consistent and regular supply. This approach will also have a positive impact on the profit potential of the company as the company will have judged their margins correctly to be able to supply and sell as much of their product as possible, without over stocking, bringing excess debt financing into the businesses.
On the other side, If the business fails to relate with the market forces and indulge in either nil or poor judgment, then this could provide a big setback to the company possibly leaving it over stocked as the product introduced was not as per the needs of market forces. Not only this, it will also hit the profit margins significantly along with reputation of the company.
Thus, all such factors prove that the relationship between market forces and organization response is therefore paramount in terms of business success and customer satisfaction. Hence, it is very important for the organizations to understand the sentiments of the market forces and respond correctly to the market in which it operates. In addition, the organizations should also consistently monitor the market forces to ensure that an organization can respond to any changes in market conditions.
Capitalism Requires Government. n.d. http://www.governmentisgood.com/articles.php?aid=13&print=1 (accessed January 21, 2015).
Public Goods. n.d. http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=public+goods (accessed January 21, 2015).