Answer the following question.
Explain the role of government budget in influencing the allocation of resources.
Explain the role of the government budget in influencing the allocation of resources in the economy.
Explain the role the government can play through the budget in influencing the allocation of resources.
Reallocation of resources: Through the budgetary policy, the government can reallocate resources so that social and economic objectives can be met.
- A tax is a legally compulsory payment imposed by the government on households and producers. The government-imposed taxes on socially unsafe goods such as alcohol and tobacco. Thereby resources will be shifted to the production of socially essential goods.
- Subsidies do not reduce the liability of the government and it does not add to the assets of the government. The government also provides subsidies for necessary goods such as wheat, rice, and sugar. Thereby the resources are shifted from the production of goods for the rich to the production of goods for the poor.
Through the budgetary policy, the government can reallocate resources so that social and economic objectives can be met in the following ways:
- The government ensures productive expenditure to maximise the welfare of the nation with a minimum level of profit.
- The government regularises the activities of the private sector to provide social benefits to the poor.
- The government imposes taxes on socially unsafe goods such as alcohol and tobacco to shift resources to the production of socially essential goods.
Fiscal policy implies the income and expenditure policy or the budgetary policy of the government. Through fiscal policies, governments can play a significant role in influencing the allocation of resources. Both tax and spending policies can alter the allocation of resources over both short-term and medium-term. For example, spending on education has an impact on future earnings, and therefore, it could eventually increase the number of individuals earning a higher income. Government impose taxes on socially unsafe goods such as alcohol and tobacco. They also provide subsidies for necessary goods such as wheat, rice and sugar.
This objective of the government is related to the allocation of resources to different areas. In a mixed economy, the private producers aim towards profit maximisation, while, the government aims towards welfare maximisation. The private sector always tends to divert resources towards areas of high profit, while, ignoring areas of social welfare. In such a situation, the government through its budgetary policy reallocates resources to maintain a balance between the social objectives of welfare maximisation and the economic objective of profit maximisation. For example- government levies taxes on socially harmful goods such as tobacco, etc. and provides subsidies for socially desirable goods such as food grains, kerosene, etc.