Why government is involved
Markets do not always work well on their own. When they fail to provide goods that society needs, or produce harmful side effects, this is called market failure. Governments step in to correct these problems and to improve living standards.
The main roles of government
A government acts in several ways within an economy:
- As a producer, supplying goods and services such as roads, defence and street lighting.
- As an employer, hiring workers in areas like health, education and public administration.
- As a regulator, setting rules that firms and consumers must follow, for example on safety and pollution.
Remember
- The government aims to serve the public interest, not to maximise profit.
- It funds much of its spending through taxation.
Public and merit goods
Public goods, such as street lighting and national defence, would not be provided in enough quantity by private firms because people cannot easily be charged for them. Merit goods, such as education and healthcare, are under-consumed if left to the market, so governments often provide or subsidise them to benefit society as a whole.
Example
A government funds free vaccinations because the wider community benefits when disease spreads less, even though private firms would not supply enough on their own.