Chapter Four: Role and Structure Of Government

4.1 Role of government

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 General roles of government
1) Provide a legal system to make and enforce laws
and to protect private property rights
2) Provide public goods that individuals or private
businesses would not provide
3) Correct market failures such as external costs and
external benefits
4) Maintain competition by regulating competition
5) Redistribute income by taxing those with larger
incomes and helping those in need
6) Stabilize the economy by reducing unemployment
and inflation, and promoting economic growth 2
 4.1.1 Market failures
❖ It occurs due to three major reasons:
a. If the market is monopolized or a small group of
businesses hold significant market power
✓ Monopoly may affect market equilibrium by using
its market power.
✓ For instance, the level of output may be less than
the market demand

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 Public goods
• Or if the god or service is a public good
• Most goods and services produced in market
economies are private goods and services.
• The consumers who purchase these goods
Consume these goods; for example, a food is
a private good.
• National defense is an example of a public
Good.

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• Public goods differ from private goods because they
have these characteristics:
i. Shared consumption:
• When one person consumes a public good, it does
Not prevent others from also consuming the good
ii. Non-exclusion:
• Once a public good is produced, it is difficult or
impossible to exclude others from consuming the
good, even if they did not pay for it.

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• Because people can consume public goods
without paying for them (called the free‐rider
problem), private businesses do not have
incentives to produce enough public goods.
• Therefore, the government often provides
them, through tax dollars, if people want
them.

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 EXTERNALITIES
b. If production of the good or service results in
externality
• Market prices usually reflect the costs producers pay
to produce goods and the benefits consumers receive
from the good.
• A kind of market failure occurs when market prices fail
to reflect all the costs and all the benefits involved.
• This kind of market failure is called an Externality
problem.
• Externalities exist when some of the costs or benefits
associated with the production or consumption of a
product spill over to third parties, who do not produce
or pay to consume the product. 7
• Positive externalities are benefits enjoyed by
someone who does not produce or pay to
consume a product.
• An example of a positive externality is
elementary education, because society as a
whole benefits when others can read and write.
• The government provides free public education
to encourage everyone to be educated.
• Positive externalities often call for government
subsidies or government provision. 8
• Negative externalities are costs paid by someone
who does not produce or pay to consume a
product.
• An example of a negative externality is air
pollution caused by cigarette smoking:
• Because others suffer from the smoke, the
government may pass laws preventing smoking in
certain places.
• Negative externalities often call for the
government to clearly define property rights, or
for corrective government measures such as
taxation or fines. 9
• Negative externality cost us more than a
trillion dollar
• For instance, climate change simply cost 40
trillion dollar for world so far.
• Reasons like subsidizing oil companies and
consumers of fossil fuels.

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❖ Some goods can’t be supplied through market
due to their non-excludability nature.
For instance, it is impossible to exclude individuals
from using street-light, fire protection, security,
etc.
❖ Government is responsible for ensuring the
provision of merit goods to a society.
❖ Merit good is a good which needs to be provided
to a society at certain levels regardless of
individual preferences.
❖ For instance, basic education, clean air, etc.
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 4.1.2 Social concerns
i. Macro-economic stability:
❖ Market are always have little social concern, so
government intervention is mandatory
❖ For instance, the need for achieving high-level
employment and price stability strongly calls for
certain public policies and ensuing government
measures.

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ii. Income redistribution:
❖ Income disparity among individuals and different
social groups is common in all societies
❖ Government actions towards maintaining equitable
income distribution are vital.
❖ There are certain policy principles to be considered for
maintenance of equity in a society; these are:
✓ Horizontal equity: equal treatment of people
✓ Vertical equity: between the have and haven’t
✓ Intergenerational equity: especially in investment
✓ Interregional equity: since regions have not the
same level of resources 13
iii. Efficient resource allocation:
❖ Market always is not perfect
❖ For this very reason, government actions are required
to allocate resources at their socially efficient use.
iv. Containment of external costs:
❖ Actions of individual firms or persons often imply
costs or benefits which are external to them;
therefore, there must be a unit who takes care of the
costs or design the way in which benefit is maximized.
❖ Since externalities are mainly social costs/benefits,
government must find mechanisms, which enable it to
contain the costs and maximize benefits 14
❖Accordingly, government has three major roles
from public finance perspectives.
✓Providing toll/merit goods which market doesn’t
provide
✓Providing rules of the game under which various
economic actors (firms, households and
individual persons) maximize their respective
benefits without jeopardizing public interest
✓Caring weaker sections of the society, who are
likely to be marginalized from accessing
marketable goods and services. 15
Other roles of the central government is:
❖The setting of national development strategies in
periodic plans;
❖The designation of the local tax structures and the
scope for the levying of charges;
❖Regulations governing the annual budgeting and
financial and audit procedures;
❖Guidance on organizational and staffing structures
and on levels of remuneration; and
❖The provision of training and technical assistance.
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 4.1.3 Local Government (LG)
❖ LG in most developing countries have been assigned a range
of functions related to the provision of local public goods
and services.
❖ In economic theory, public goods or services are
distinguished from private goods and services.
❖ There is no financial incentive for the private sector to
provide “public goods,” because there is no practical means
available for private firms to charge individual consumers for
such goods and services.
❖ These types of goods and services are said to suffer from a
“free rider” problem: once they are made available, it is
difficult to exclude non-payers form consuming them.
❖ Examples of local public goods include streets and footpaths,
street lighting, air-pollution control, and fire protection.
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❖Some public goods and services are best financed by
taxation and planned, organized, and provided by LGs.
❖The private sector can play a valuable role in the
actual delivery of some of these services, such as road
construction and maintenance, through contracting.
❖LGs normally are allocated responsibility for detailed
urban planning and urban development control.
❖They are responsible for controlling both land
development and land uses, as well as providing basic
urban infrastructure services such as water supply,
roads, sewerage and drainage systems, and parks and
recreational facilities.
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❖LGs have, over the years, expanded their activities
into the production of private goods and services,
such as housing, recreation and sporting facilities,
and health services.
❖The reason is to provide subsidized services to
low-income residents who would otherwise be
unable to afford these services at the private
market price.
❖In other cases, LGs have made use of grants or
vouchers (coupons) to subsidize the poor.
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❖ Some of the functions undertaken by LGs involve the
supply of public-utility-type services where there is a
“natural monopoly” situation.
❖ The provision of water, electricity, the road system, and
piped gas are in this category.
❖ Competition in the distribution of these services is
not really feasible, because it would involve wasteful
duplication of resources to construct competing
network systems.
❖ Urban governments have usually been allocated
responsibility to provide these public-utility services to
prevent them becoming private monopolies.
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Thus, the role of local government is to:
❖ Undertake, efficiently and effectively, functions allocated to
it by the CG;
❖ Provide services in response to the needs of residents;
❖ Mobilize resources from its own residents to undertake
these functions;
❖ Plan, program, and budget the efficient provision of urban
public services to meet the needs of its residents;
❖ Coordinate with other levels of government for the
provision of urban services and provide reports to them;
❖ Plan, control, and monitor the use of land and
environmental assets; and
❖ Make effective use of inter governmental grants and loans.
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 4.2. Structure of Government
❖Three important questions are relevant in
discussing government structure.
✓ How many levels of government are required to
provide citizens adequately with basic public
services?
✓ How much autonomy does each level of
government have?
✓ To what extent government functions and sources
of government revenue are separated by levels of
government and to what degree do they overlap
and require coordination? 22
❖In most nations, government contains multiple of
structures and levels within itself, each of which
have their own jurisdiction and laws.
❖There are several system of government, among
which, unitary and federal systems are popular.
❖Both systems include a CG that is spread nationally,
along with governments of smaller division of the
country such as state, province, district, & city
government.
❖All government structures function according to
defined system, principle & laws. 23
 4.2.1 The unitary system
❖The unitary system gives the main powers to the
CG.
❖State, provincial, and LGs are all created by the CG.
❖Governments below the centre have only powers
that are appointed by the CG.
❖Countries such as France, Italy, Japan, and the
United Kingdom, along with other democratic
nations use the unitary system of government.
❖China, North Korea, Cuba, and other communist-
based governments have unitary systems too.
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• It requires or works best in nation where few
cultural differences exist within the state and
a strong sense of national pride and unity is
prevalent.
• But in divers society the probability of ones
belief and value will imposed over the other

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 4.2.2 The federal system
❖ It develops when a number of states or provinces
federate, or form a union, eventually in order to
establish a nation.
❖ In a federal government system the powers are jointly
shared between the CG and the more local or regional
governments (state, providential, district, etc.).
❖ Both of the national and regional governments are
directly tied to the people, who are the source of
democratic government’s authority.
❖ Country such as United States, Canada, Argentina,
Australia, Austria, Belgium, Brazil, Germany, India,
Mexico, Switzerland, Nigeria and Ethiopia.
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 Government structure is described in two ways:
i. Structure: is defined in terms of,
✓ Number of governments
✓ Their size
✓ relationship with one another
✓ area of authority and responsibility
✓ the amount of money flowing in the hands of
different government structures
✓ sources of money that flows into government
reserves
✓ use of money in government coffers
ii. Financial mandate: Financial mandate refers to
financial powers and expenditure responsibilities
assigned to different levels of government.
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• End of the chapter!
• Thank You!