The Role of Government

What Are the Government’s Economic Roles and Goals?

You, as an individual and as a consumer, make economic decisions regarding your time, talent, and treasure. The same is true for everyone, including businesspeople and even those who work in the government.

We’ll explore how government-based decisions in a mixed market economy are different from the decisions you make in the market. Then we will consider the economic goals—shared by both consumers and businesses (producers)—that make up a healthy economy. These goals are particularly important in a crisis like COVID-19 as the economy is disrupted. Everyone needs to work together toward common goals to return to a better economy.

Impact on Prices and Production

Government intervention has a strong influence on how scarce resources are allocated—both for sellers and for buyers. Even though most government policies are in place to serve the general public, they can lead to cost increases and inefficiencies that business owners need to adjust for. Government policies can also cause prices to rise, making it necessary for consumers to adjust what they buy to cover the price increases.

Through laws, regulations, taxes, and subsidies, the government can cause businesses to produce goods and services at different prices than they would if left to a free market economy. Producers must research and account for the government policies that might impact their production, price, profit, or opportunity costs.

Government Laws, Regulations, and Subsidies in Action

Imagine a scenario in which students are considering opening a school store. Their teacher, Ms. Kim, advises them to offer products for which they can be the low-cost provider.

After analyzing their comparative advantages—that is, looking at who can most efficiently produce or provide an item—the students realize that the school cafeteria already has the comparative advantage for snacks, while the school bookstore has the advantage in supplies such as paper and pencils. Ms. Kim’s class decides to be the low-cost provider of customized shirts and other items with the school logo.

The students identify other factors that would affect their new store as well as their consumers—government laws, regulations, taxes, and subsidies.

Government? What does government mean in this context? In this case, it’s the school administration. Consider the following scenarios and predict whether the action would help or harm the store or the consumer who shops there.

What if the school administration:

• Sets a maximum allowed price for any single T-shirt?
• Requires all backpacks sold to come with a special lock that the administration can open?
• Requires students to wear T-shirts with the school logo and colors as part of a uniform?
• Places a tax of $2 on every shirt the students customize with the school logo?
• Provides the neighborhood bookstore (the usual producer of school T-shirts) a $2 subsidy for every shirt it customizes with the school logo?

These are fictional scenarios, so predicting exact outcomes might be difficult. But each of these administrative policies will clearly have an effect—either positive or negative—on the store, the consumer, or both.

Economic Goals in a Market Economy

Think about businesses (producers) and consumers. Are their goals the same, or do they appear to have opposing objectives?

Both are driven by scarcity and self-interest: businesses want high profits, while consumers want low prices. However, sellers and buyers in a market economy share larger goals. Remember, businesses are made up of individual people, so it’s no surprise that we are all driven by the same overall goals. And it is these shared goals that create the economic system that allows both businesses and consumers the opportunity to thrive.

Generally, trade creates a win-win opportunity, making life better for everyone involved over time. This system works best when government intervention in the market is limited and buyers and sellers can negotiate freely. But sometimes the government does need to step in, especially when defense and public goods are needed and during a crisis, such as the COVID-19 pandemic.

We’ll be looking at seven goals in a market economy. As you explore these goals, you’ll see how each relates to businesses, individual consumers, and government.

Goal 1. Economic Freedom

The U.S. Constitution and Bill of Rights protect our rights to life, liberty, property, and the pursuit of happiness. These protections give you economic freedom to pursue how you’d like to earn a living, and to choose whether to go into business, how much to save, when to invest, and how to spend your income and time, as well as other decisions. There is no guarantee you will always get what you aim for, but you have the freedom to pursue it.

Imagine the U.S. economy as a gigantic ship on which we are all traveling around the world. We each own our time, talent, and treasure, and each of us owns different resources. We also have needs and wants: we all have to eat, sleep, be entertained, be protected, and so on.

As a passenger on this ship, would you like to have the freedom to decide what to do with your time, talent, and treasure? Or, would you rather have the ship’s captain (the government) in charge of who does what and when, who gets a nice cabin, or who sleeps in a deck chair? It may sound appealing to be taken care of by others—until you realize their decisions might not be in your best interest.

Whether as a consumer, an individual providing labor, a producer, or a seller, most of us want the freedom to decide how we contribute to the economy.

Watch a firsthand account of economic freedom changing the lives of the people of Zambia:

Goal 2. Full Employment

Most U.S. consumers, businesspeople, laborers, and government officials agree that our country should strive for full employment of resources, production capacity, and labor. Full employment means that labor productivity is high, businesses are buzzing along, investment is strong, and people are working, consuming, and saving purposefully. Everyone with skills that employers need can find jobs in a growing economy.

On our metaphorical U.S. economy ship, everyone benefits from full employment. Ship-based businesses hire people to perform all the tasks that need to be done, such as food preparation, maintenance and repairs, navigation, and communication with other ships traveling around the world. All passengers on the ship have work, and they get paid for doing it. In turn, they can spend their income on the goods and services that they want.

Now, picture what would happen if people born in a month that begins with the letter J were not allowed to work. Those people still need income. Businesses need people with income to make and then buy their goods and services. Not only would the people without income have a problem, everyone on the ship would suffer.

Goal 3. Economic Growth

Americans agree that economic growth is desirable. Economic growth means an increase in the real output of goods and services per person in the U.S. economy during a year.

On our economy ship, growth means that at the end of the first year of our travel, we’re all creating and trading more than when we started. Why is that good? Isn’t it just more stuff? Not exactly.

The best way to understand economic growth, like many of the other seven goals, is to imagine life without it. On the ship, without economic growth, fewer people would be buying goods. That means fewer profits would be available to work on new innovations, fewer jobs would be needed, and fewer people would be working. It quickly becomes apparent why analysts call that a “shrinking” or “contracting” economy. Everything is connected, so everyone suffers together.

Goal 4. Price Stability

Price stability means that prices of goods, services, and resources do not change significantly, either up or down, over time. U.S. history has taught us that stable prices make life much easier. For example, price stability makes it easier for individuals to plan. Historically, rapid increases or decreases in prices have created hardships for many businesses, their employees, and households. Price swings are problematic even in the short term.

Returning to our U.S. economy ship, imagine that, overnight, the price of everything doubles—but your salary does not. Suddenly, you’ve lost purchasing power. Your wages won’t buy as much as they used to. That means you’ll have to cut back: save less, spend less, or go without something you used to be able to afford. Or, imagine that the cost of food goes up significantly, then down, then back up again. Since everyone is facing the same price instability, other costs start changing as businesses try to cover the extra costs they face.

This instability is not healthy for an economy. People want to know how much money they will have to buy the things they need and want.

Goal 5. Economic Security

A degree of economic security is important. Economic security happens when the basic needs of every person are met, primarily through the fruits of labor and business success. The fruits of one’s labor, ideas, and efforts are private, so people can use them as they wish. People who are unable to pay their own way for whatever reason—disability, advanced age, serious illness, or accidental injury, for example—are assisted by personal savings, insurance, and able-bodied people. Government also steps in when the private sector cannot.

Back on our ship, let’s imagine that some people sold popular products and have become wealthier than those doing less lucrative jobs. Perhaps people who have become wealthier are able to afford larger cabins on a higher deck where cabins cost more. While we can be happy for those who worked hard and found a higher deck, most people also want to make sure there’s a “safety net” to protect those who cannot take care of themselves for some reason and to keep them from falling overboard.

Goal 6. Economic Equity

Americans believe in economic equity, meaning fairness and impartiality. The economic system should offer all citizens—regardless of gender, race, color, or religion—equal access to economic opportunities.

On our economy ship, most people, both producers and consumers, want fairness. Everyone has the opportunity to contribute within a fair system. Equity does not mean that everyone earns the same salary, but that people of equal skill doing equal work should earn equal pay.

Goal 7. Efficiency

Another American economic goal is efficiency. Economic efficiency refers to the entire economy’s ability to get the most out of its limited resources at the least cost through individuals’ and businesses’ wise stewardship of their resources.

All resources are limited. Some are finite and cannot be replaced once gone. Businesses, consumers, and government officials know that anything that is wasted costs everybody. Businesses want efficiency to keep profits up, and consumers want efficiency to keep costs (and hopefully prices) down.

Thinking one last time about our economy ship, you can easily imagine how limited the space and onboard resources are. What if someone decides to sell food on deck and forgets to protect it from the salt-water spray? The food is ruined, but the seller still has to pay for the food’s cost—even though he cannot sell any of it to customers. Most likely, the seller will have to raise prices the next time around to cover the loss. Any price increase gets passed along to the customer. Waste affects everyone.