Chapter 24: The role of government

24.1 Factors that influence the role of government

A government plays a larger role in an economy operating a mixed economic system
than one operating a more market based economic system. How much the government
intervenes in mixed economies differs according to both the perceived extent of market
failure and how effective government policy measures are. TIP
Find out what goods
and services the
24.2 The government’s influence on government provides
the local economy in the area where
you live.
Some local areas are very dependent on particular industries. Some of these industries
may be state-owned industries. In this case, the government will be making decisions such
as how much to produce and the wages to pay, which directly affect the local community.
The industries which are in the private sector may be subsidised by the government to, for LINK
instance, prevent unemployment rising in a relatively poor area.
Chapter 15.3
Some decisions on economic policies will be taken at the local level, rather than the Government measures
national level. The extent to which decisions are made at the local level differ from to address market
country to country. Local governments may provide a range of goods and services failure (Direct
provision)
including refuse collection, libraries, housing and local roads. To finance these, local
governments may impose some taxes and charges and may receive grants from the
national government.
KEY TERMS
24.3 The functions of government at local Local government:
and national levels a government 215
organisation with
The government carries out a range of functions. It is an owner of industries and assets such the authority to
as schools and hospitals, a producer, a regulator, a collector of taxes and a director of the administer a range of
level of economic activity. policies within an area
of the country.
Natural monopoly:
The government as a producer an industry where
A government may produce products which it believes are of key importance, the products a single firm can
produce at a lower
that are produced by a natural monopoly, those which it thinks are essential and hence
average cost than two
should be available to all and those which the private sector may under-produce or not or more firms because
produce. of the existence of
significant economies
Most countries seek to ensure that their key industries survive and do well.
of scale.
Key industries may be strategic industries or national champions. In China and
Strategic industries:
France, for instance, such industries are often run by state-owned enterprises. In Italy,
industries that
they receive favoured loans from banks. In a number of countries, the government are important
also stops foreign companies from taking them over or merging with them, such as for the economic
rail infrastructure which may be run or regulated by the government. This is, in part, development and
to prevent consumers being exploited by a private sector firm charging a high price. In safety of the country.
addition, to produce at a low average cost a high output may be required and at such an National champions:
output, a loss may be incurred. industries that are, or
have the potential to
A government may also produce essential products, such as housing, on grounds of equity be, world leaders.
and merit and public goods.
 Cambridge IGCSE Economics

Public sector contracts and partnerships between the public

and private sectors
Private sector firms provide a range of products and services for the public sector. For example,
private sector road building firms construct and maintain roads for the government in many
countries, and private pharmaceutical firms supply state healthcare systems with medicines.
In recent years, in more and more countries, the government is forming partnerships with
private sector firms. A common form of partnership is where the private sector initially
provides the finance for a state project, such as the building of a hospital. The private sector
firm then builds it and maintains it for a number of years. The government rents it and
operates it, buying it back over time.
In other cases, the public and private sectors provide part of a service. For instance, private
sector firms may run train operating companies, whilst the government builds and maintains
the infrastructure.

GROUP ACTIVITY 1

Over the years, the Chinese government has identified a number of national champions. In
recent years, these have included the biotechnology industry, the new energy cars industry
and the rare earths industry.
a Identify two ways a government could promote the growth of a national champion.
b Identify a possible national champion from your country and explain your choice.

216 The government as an employer

The government employs workers and managers to operate its state-owned enterprises.
Employing people helps a government to achieve some of its aims for the economy. To reduce
unemployment, the government can employ more workers. To control rises in prices, the
government can limit wage rises of its own workers and the prices charged by its enterprises. It
can also set an example in terms of employment practice by, for instance, providing its workers
with good quality training, preventing discrimination and ensuring good pensions to its workers.

INDIVIDUAL ACTIVITY 1

The number of letters and parcels being sent by post (mail) is declining throughout the world.
In some countries, for example the Netherlands, the postal industry is in the private sector. In
others, it is in the public sector, for example the Nigerian Postal Service is government owned
and operated.
a Explain one argument for:
i the state delivering mail
ii private sector firms delivering mail.
b Explain two advantages of working for a state-owned enterprise.

24.4 The role of the government at an

LINK
international level
Chapter 37.4 Methods Some governments promote free international trade, allowing firms to export and import
of protection what they want. Other governments place restrictions on what can be purchased from and
sold to other countries.
 Chapter 24: The role of government

Governments also vary in their policies towards foreign multinational companies (MNCs) KEY TERMS
wanting to set up in their countries. Some governments seek to attract them, believing
Trade bloc: a regional
they will generate jobs and increase the output that is produced in the country. Other
group of countries
governments stop foreign MNCs setting up in their countries as they think they will drive that remove trade
domestic firms out of business. restrictions between
themselves.
Some governments are also members of trade blocs such as the European Union (EU) and
Mercosur (a Latin American trade bloc). Trade blocs promote trade between the member Free international
countries and may restrict trade with non-members. In addition, governments belong to trade: the exchange
of goods and
international organisations. For instance, in 2016 there were 164 member countries of the
services between
World Trade Organisation (WTO). The WTO deals with global rules of trade between member countries without any
countries. Its main aim is to promote free international trade. restrictions.

GROUP ACTIVITY 2

In August 2006, the government of Bahrain announced that government departments,

schools, universities and other state institutions would have weekend holidays of Friday and
Saturday instead of Thursday and Friday. The change was designed to bring Bahrain in line
with other countries in the region, including Libya, Iraq and Syria which had also changed
their weekends. It was also designed to make it easier for Bahrain’s private sector firms, the
majority of which work from Sunday to Thursday, to do business with the government. Six
years later the government brought in new employment legislation. These included more anti-
discrimination rules, for example, banning dismissal from employment being based on sex,
colour, religion or membership of a trade union, and an increase in annual leave from 28 to 30
days. Bahrain is a member of the WTO and along with Kuwait, Oman, Qatar, Saudi Arabia and
the UAE, a member of the Gulf Cooperation Council (GCC).
217
a Identify three products that may be supplied by private sector firms to government
schools.
b Explain how increasing annual leave and reducing discrimination may increase a country’s
output.
c Find out whether your country is a member of a trade bloc.

Summary
You should know:

■ Governments may raise some taxes and provide some goods and services at the local level.
■ A government may seek to ensure the survival of key industries by running them as state-owned
enterprises.
■ A government may run a natural monopoly and may produce essential products.
■ Governments produce, or at least finance, the output of public goods and may produce merit goods.
■ Governments may work in partnership with the private sector to finance a government project or to
provide a good or service.
■ Employing workers can help a government achieve its aims for the economy including reducing
unemployment, keeping inflation low and raising the standard of employment practices.
■ Governments may promote free international trade or impose restrictions on international trade.