Basic framework
Welfare economics and government
Public sector or simply government is the part of economy concerned with providing public goods and services. People often take the existence of government as inescapable. However, according to one popular branch of economics, welfare economics, government is seen as an economic agent who has a certain aim in the economy - to improve the social welfare. In other words, the role of government is to correct failures of market mechanism. This way of thinking assumes that in most of the cases market economy is able to use economy`s scarce resources socially optimal way. However, there are certain situations under which market mechanism fails and leads to the state that is undesirable from the social point of view.
Following pages in this learning object basically address three main functions of government, each aiming to correct some broad type of market failure. These are:
1) markets fail to use resources efficiently: inefficiency means that there is possibility to increase somebody`s welfare without harming somebody else`s welfare.
2) markets fail to maintain macroeconomic stability: stability here mainly refers to stable average price level, low unemployment and economic growth.
3) markets fail to distribute the goods and services equitably: equity here refers some principles of social justice.
As follows, these three points are more closely discussed.