Chapter 24
THE ROLE OF GOVERNMENTS
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.
• 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
subsidized by the government to, for instance, prevent
unemployment rising in a relatively poor area.
• Some decisions on economic policies will be taken at
the local level, rather than the national level. The
extent to which decisions are made at the local level
differ from country to country. Local governments
may provide a range of goods and services 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.
The Government as Producer
• Government may produce products which it believes
are of key importance, the products that are produced
by a natural monopoly, those which it thinks are
essential and hence should be available to all and
those which the private sector may under-produce or
not produce.
• Most countries seek to ensure that their key
industries survive and do well.
• Key industries may be strategic industries or national champions.
In China and France, for instance, such industries are often run
by state-owned enterprises. In Italy, they receive favored loans
from banks. In a number of countries, the government also stops
foreign companies from taking them over or merging with them,
such as rail infrastructure which may be run or regulated by the
government. This is, in part, to prevent consumers being
exploited by a private sector firm charging a high price. In
addition, to produce at a low average cost a high output may be
required and at such an output, a loss may be incurred.
• A government may also produce essential products, such as
housing, on grounds of equity and merit and public goods.
The Government as an Employer
• 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 r 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.
The Role of Government at an
International Level
• some governments promote free international trade,
allowing firms to export and import what they want. Other
governments place restrictions on what can be purchased
from and sold to other countries.
• Governments also vary in their policies towards foreign
multinational companies (MNCs) wanting to set up in their
countries. Some governments seek to attract them,
believing they will generate jobs and increase the output
that is produced in the country. Other governments stop
foreign MNCs setting up in their countries as they think they
will drive domestic firms out of business.
• 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 countries and may restrict trade with non-
members. In addition, governments belong to international
organizations. For instance, in 2016 there were 164 member
countries of the World Trade Organization (WTO). The WTO
deals with global rules of trade between member countries.
Its main aim is to promote free international trade .