In any type of economic system, the purpose of economic activity is to satisfy the material needs of that society and to improve the welfare of members of society.
People receive income, spend, save and invest. Hence decisions must be made about the allocation of resources among various products to determine the type of goods to be produced with available resources. Further decisions must be made on the extent to which decisions must be made on the extent to which output will be used for immediate consumption or for use in future production or the rate of overall real capital accumulation as a whole.
The economy has to decide the particular techniques of production to be selected. Decision regulating the distribution of the output of society among its various members must also be determined. There are three general ways in which the problems can be solved.
- Decisions may be made by some form of authority designated as a government, which is able to enforce its decisions upon the members of the society. (Centrally planned economy).
- Decisions may be made automatically through the operations of the market mechanism (market economy)/capital.
- The decisions may be made through the interaction and co-ordination between market mechanism and government authority (mixed economy).
Role of government in a capitalist economy
- Provide law and order.
- Promote equality in income and wealth distribution in use of taxation and expenditure.
- Protect the interest of the working class and common man by enacting labour laws and social security legislation.
- Provision of public goods such as defense, bridges, park, education, health etc.
- To ensure economic efficiency by proper allocation of resources, through competitive environment.
- To solve the problem of expenditures caused by private activities.
- To undertake risk investments which cannot be taken by private activities?
- Help in economic growth and development.
Role of government in a mixed economy
- Resource allocation through public expenditure, price controls and income.
- Consumer protection from monopolies.
- Provision of public goods and services.
- Distribution of income and wealth
- Optimal diversion of resources
- Development of private sector through subsidies, tax concession, and tax holidays etc.
- Undertake development projects.
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