Market Failure and Externalities

Role of the Government in the Budget Process

The budget process is the primary method through which the government seeks to
accomplish its annual and multi-annual objectives. The government can reveal its priorities in the
budget process. The budget is the primary instrument the government uses to implement fiscal
policies (Mikesell, 2013). A budget document is the primary contractual document between the
citizens and the state (Willoughby, 1972). It shows how the government intends to raise
resources and plan to spend resources (Key, 1940). The government is responsible for ensuring
that the budget document commands the utmost trust and respect for it to serve as the basis of
accountability. The budgeting process is considered efficient if it establishes trust in citizens
(The Functions of the Government in the Budget Process Video). A budget must also ensure that
resources are used efficiently and sustainably in line with public finance principles.
Budgeting is a process that is embraced at all levels of government. One of the significant
roles of the government in the budgeting process is strategic planning. The government defines
the objectives that it seeks to achieve and the resources needed to achieve these objectives. The
government defines future goals and policies. The policies and goals are then appraised, and the
best courses of action are developed (Schick, 1966). The government also plays the role of
management control. The government ensures that all resources collected are used effectively
and efficiently. In addition, the government ensures that all the planned objectives are
accomplished effectively and efficiently (Schick, 1966). All alternative courses of action are
evaluated and action plans developed.

Role of the Government in Correcting Externalities

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The government can play a significant role in the reduction of externalities as well as the
correction of market failures. The primary response by the government in case of market failure
is the efficient allocation of resources. Efficient allocation of resources is achieved when there is
an intersection between the demand curve and the supply curve (Rubin, 2015). The demand
curve expresses all the benefits that accrue to consumers from consuming a particular good. On
the other hand, the supply curve expresses the costs associated with the production of goods.
When the two intersect, there is the optimal allocation of resources. The government also
responds by either encouraging or discouraging the consumption of certain goods and services.
The government can pass laws that seek to ensure that the public does not consume certain goods
and services. Taxes can be imposed on specific products and raise the price to discourage the
consumption of goods and services. Taxes can also be used in raising the revenue and, in so
doing, encouraging spending. Another response that the government can adopt is the
redistribution of income. The government can come up with various social welfare programs.
Social security is also a program that the government can use in redistributing income.
Justification for the Use of Taxpayer Resources in the Correction of Externalities and

Market Failures

The market maximizes benefit by achieving the level of output where the marginal
benefit equals the marginal cost. In such a case, an efficient solution is achieved in the market.
However, market failures and externalities create economic inefficiency (The Role of
Government in a Market Economy). In certain situations, markets fail to achieve efficient
solutions. Inefficient quantities of goods and services are produced in the market. In imperfect
competition, the output of goods and services fails to achieve the efficient level (The Role of
Government in a Market Economy). Therefore, the use of taxpayer resources is justified in

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correcting the economic inefficiency (Coursera, 2021). In case of market failure and
externalities, the government steps in in case of market failure by figuring out the efficient
quantity that needs to be produced where the marginal benefit equals the marginal cost.
In the case of a public good, the exclusion could be seen as costly. The marginal cost of
adding another consumer is zero. Public goods mean that consumers cannot be excluded from
consuming the goods because they have not paid for them. Every consumer can, thus, be a free
rider in the consumption process (Coursera, 2021). The use of taxpayer resources is justified
because the government can produce the goods or contract other producers to produce the goods.
Further, in cases of imperfect competition, the government can come up with various measures
that seek to move the market solution to efficiency. The government can either provide subsidies
or come up with measures that encourage activities that create external benefits.

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References

Coursera. (2021). 4.4.1: The role of the government in providing public goods – Externalities +
public goods | Coursera. https://www.coursera.org/lecture/microeconomics-part2/4-4-1-
the-role-of-the-government-in-providing-public-goods-
n3bGA?utm_sourcehttps://www.coursera.org/lecture/microeconomics-part2/4-4-1-the-
role-of-the-government-in-providing-public-goods-n3bGA?utm_source
Key, V. O. (1940). The lack of a budgetary theory. American Political Science Review, 34(6),
1137-1144.
Mikesell, J. (2013). Fiscal administration. Cengage learning.
Rubin, I. S. (2015). Public budgeting: Policy, process, and politics. Routledge.
Schick, A. (1966). The road to PPB: The stages of budget reform. Public Administration Review,
243-258.
The Functions of the Government in the Budget Process Video
The Role of Government in a Market Economy Video
Willoughby, W. F. (1972). The movement for budgetary reform in the states (No. 4). Ardent
Media.