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What does It Mean?

Over the years, some policymakers have sought to exert total economic influence in the hopes of pursuing social or political aims, while others have managed to keep out of economic relations entirely in the assumption that markets are performing well if unchecked.

Most of the largest economies in the world today are capitalist, i.e., systems that allow individuals and businesses to own property and compete for profit and economic well-being.

Producers and consumers make innumerable individual decisions in a capitalist economy that together form part of the larger economic picture. While governments at the U.S. local, state, and domestic levels intervene less than their counterparts in economic matters in many countries, they nevertheless have an important role to play and the power to alter the national economy monumentally.

Although municipal and state governments will have a significant effect on their economies, the federal government at the national level is even more likely to change the economic environment.

The role of the government in the economy can be divided into two fundamental sets of functions: it is concerned with fostering economic prosperity and development and with governing and controlling the economy.






Protection of Private Property/ National Security

The government’s job is to uphold the rule of law, fundamental law, and order. In a free market, there is an opportunity to travel openly on the protection of law and order, which is why it is generally not accessible.

Throughway of general taxes, the government will pay for policing. The government has a similar function to provide national defense – the payment of an army.

The public good – which usually needs government provision – is an example to the authorities and courts.

Raising Taxes

The government has to collect taxes to offer basic goods and municipal services.

They can do that in several ways: goods taxes, income taxes, people’s taxes, and property and land taxes. The government must take into account the right way to collect taxes. Efficient is a good tax; easy to charge; fair.

If the administration runs a budget deficit, it will have to increase the deficit by borrowing and selling government bonds.


Providing Public Services

Instead of free-rider issue, public goods appear not to be distributed in a free market. That is why the government will provide such goods and services.

For example, road lighting, bridges, law, and order are public utilities. Government programs, for example, education and healthcare, are also sold in bits on the open market.

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Consequently, most governments provide education and healthcare in some form of state.


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We noted that companies were often able to create monopoly powers in the ‘Wealth of Nations’ free market. This helps them to charge customers unfair rates.

The government may need to regulate monopoly power such as prohibiting fusions or fixing natural-monopoly price limits. Companies may also establish a monopsony capacity to pay low wages and provide employees with bad working conditions.

In this situation, other labor market legislation like minimum pay, minimum working age, and general standards of safety and health may be required by the Government.


Financial conditions – global booms and recessions – should be applied by industrial economies. Cuts in demand and higher unemployment will lead to recessions. In this case, fiscal policy can be used by the government to influence aggregate demand.

In recent years, however, many governments have delegated monetary policy to the independent Central Bank. The government can also use monetary policy.

The government will also attempt to avoid inflation, as well as to try to solve recessions. Higher taxes and higher interest rates may be involved.


We could see an increase in inequality and poverty in a capitalist economy. This may be because of inherited riches and opportunities. The monopoly power could also be the cause of it.

The government may feel it is essential that everyone has equal opportunities, such as education so that even poor families have the possibility of qualifying. It also may involve the redistribution of income for low-income earners, for instance, progressive taxes such as higher income tax rates, as well as the provision of proven benefits such as income support/home pension and state pensions.

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