A government is basically a mechanism where market failures are addressed. Generally, open markets can supply the needs and wants of a society. However, in many cases, certain goods and services would not be supplied or may be supplied at economically inefficient levels. Such services might include the extremely socially desirable areas such as health, education, roads, police and legal services and so on ad infinitum. Although some services previously provided by governments are now undertaken profitably by private enterprises (such as our national airline, the Commonwealth Bank and the like), there are large numbers of services that a government must still provide, such as health, social order and social welfare. These services are never provided by private enterprise.
Governments also go into the business of providing services that could be supplied by a private enterprise. There are two main reasons for this. One reason is to achieve economies of scale in an operation. Consider the Post Office, which is able to maintain an excellent distribution network because it is the only body performing this service. Private letter delivery companies do operate, but at far lesser efficiencies than the Post Office.
Another important reason is to avoid, or at least control, the development of a monopoly in a market. An instance of this is where a distribution network, such as a pipeline or an electrical transmission grid is required. This is funded and setup by a government organisation, which can then regulate who gets use of the network, whilst still achieving economies of the scale for the network. The rollout of the Foxtel and Optus cable television cable networks about ten years ago is a classic example of the inefficiencies of having two distribution networks for the one product, and corrective steps have recently been taken by Optus and Foxtel to solve the problem.
Another example is the Public Switched Telephone Network (PSTN) owned formerly by Telecom Australia. While the telecommunications industry was developing, the government was able to supply the services as a monopoly and fund the provision of the network. Now, external competitors to Telstra have access to the PSTN, and legislation determines its use. This would not be possible if the PSTN was owned by a private enterprise. After all, a business is hardly likely to give competitors free and full access to one of its privately owned income-generating assets.
Another major function of government is to stabilise economic fluctuations. Throughout the economy various measurements of the economic activities being carried out (such as the All Ordinaries Index) are subject to constant flux. In general, indices increase, but sometimes the movement is in spectacular gains, followed by equally spectacular falls. A government works to try evening out the peaks and troughs in various indices.
A government has a vast array of mechanisms it can use in order to achieve this. It can spend to stimulate demand, and bring an economy out of recession. It can increase interest rates and invoke a credit squeeze in order to slow demand, and bring an economy out of an overheated situation. It can also channel resources into sectors that may be deserving of them, such as into Health, Social Security, Defence and the Arts, areas private enterprise may be neglecting. It can perform these latter actions maybe in sympathy with the business cycle, or maybe to simply re-direct resources within the economy to more “deserving” areas.
In order to fund these operations, a government is entitled to raise taxes. Indeed, the raising of taxes is yet another way the government can influence the economic cycle, by controlling the incidence and amount of tax an economy pays. It can also direct taxation to various sectors of the economy, favouring one section at the expense of another. It can help to increase Research and Development spending, for example, by allowing favourable tax deductions for R&D spending. This encourages certain economic activities that are otherwise being neglected by private enterprise.
In all, the government is an important stabiliser of the economy, and ensures that society still receives the services it needs when there is a failure of the open market to provide them.
The Greens have been criticised lately due to their policies to introduce new taxes. They certainly do have a number of new taxes they'd like to introduce, but their implementation simply serves as a mechanism for evening out the imbalances in society. As a government, taxation is one of the most important tools at your disposal.
No comments:
Post a Comment