Economic Essay on The Economic Role of Governments

The Economic Role of Governments

The role that the governments should play in the market has always been a topic for heated debates for quite some time. Nevertheless, the assertion of conservative theory is that the role of the state in an economy ought to be limited in order to enhance economic and political freedom. The government is not trusted by the people completely when it comes to solving economic and social challenges.

As such, the advocacy of this theory is a limitation of the responsibilities of the government to prevent large organizations’ control and bureaucracy sluggishness. The liberal theory on the other hand questions the market’s ability to offer economic solutions. The emphasis of this theory is on the ability of the state to provide market limitations’ solutions. Nevertheless, the focus of this theory is not on individual freedom. It does not advocate for a price system designed to favor those with the ability to purchase commodities only.

Tanzi (2011) notes that some states such as the United States allow limited market intervention by the government (p. 3). Self regulation of the market is allowed by the government where there is a free-market economy. The government intervenes when necessary to rectify the market. Usually, the market is not ‘perfect’ all the time. The government may intervene in order to prevent negative externalities and monopoly, imposing laws and providing public goods (Denny, 2006, p.1). Several economic functions are however attributed to the state including redistribution, allocation and stabilization of resources (Radu, 2013, p. 233).

Among the roles played by the government include providing social and legal structure. The government creates courts that it uses to enforce the laws. It also defines and implements property rights while establishing a monetary system. It is also the responsibility of the government to offer public services and goods which are difficult for the market to provide including firearms. The federal government in the US offers national defense while collecting security and social taxes, paying security benefits, building highways and ensuring excellent quality of medicine and food.

The government intervenes in the market as a way of preventing monopoly and ensuring competition. It also enforces anti-trust laws. Taxes on industries that produce toxic gases and cigarettes are imposed by the government as a way of correcting externalities. According to Radu (2013), the government needs tax to fund public expenditure (p. 224).

The biblical perspective is that every individual ought to be subjected to the authority of the government that is in power. The government has a role of maintaining order and reprimanding law breakers. The nature of civil governments is secular while Christianity governments are spiritual. As such, it does not matter what the nature of the government that is in power is. All Christians have to submit to their governments because it is God who has put them in power. To avoid conflicting with the set laws, Christians should pay the taxes set by the government. The purpose of God for the earthly governments entails punishing evil-doers and rewarding obedience.

Externalities represent spill-over effects caused by consumption or production decisions that do not go via the set price system (Schmidtchen, 2009, p.2). They rely on their ability to impose costs or benefit decision makers. Externalities may cause market failure if a price mechanism does not account for their social benefits or social costs in the consumption or production process. Public goods refer to non-excludable goods. Mankiw (2011) notes that, deadweight loss refers to total surplus’ reduction which arises from a reduction of the market below optimum because of the imposed taxes. Economic efficiency is affected by this loss which causes trade reduction.

Economic efficiency entails the use of the available resources in achieving higher levels of producing services and commodities. The economy has to suffer when a government fails to intervene because the market usually tends to exploit the citizens. It is the responsibility of the government to ensure efficient running of the economy through the protection of property and individual rights. Goods that have positive externalities ought to be subsidized by the government including education.

The government ought to enhance efficiency in the economy by offering public services and goods that include national defense and roads. The government ought to reduce monopoly while cutting taxes in order to reduce deadweight loss. Although state policies are not a guarantee for posterity, it should always be the endeavor of the government to ensure economic stabilization through equitable distribution of resources.



Denny, J. A. (2006). The role of government in economy and business. Yogyakarta: LKiS.

Mankiw, N. G. (2011). Principles of economics. Mason, Ohio: Thomson South-Western.

Radu, C. (2013). The Importance of the State’s Involvement in Economy. Scientific Journal Of Humanistic Studies5(8), 223-227.

Schmidtchen, D. (2009). Transport, welfare and externalities: Replacing the Polluter Pays Principle with the Cheapest Cost Avoider Principle. Cheltenham, UK: Edward Elgar.

Tanzi, V. (2011). Government versus markets: The changing economic role of the state. New York, NY: Cambridge University Press.


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