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It was suggested by Adam Smith in 1776 that individuals led by self interest, accidentally advance the interests of society.

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Introduction

HND Social Science Public Sector Economics Unit Number: 6420222 Outcome, 4 Langside College Glasgow Author: Alex Leckie Lecturer: Janet Cole Submission: 29/01/2003 It was suggested by Adam Smith in 1776 that individuals led by self interest, accidentally advance the interests of society. If this is true and the selfish free market economy efficiently allocates resources at minimum cost, why is there a need for any government intervention in the economy? A simple answer for this is the concept of Market Failure. Market failure is the incapacity of an unfettered market to efficiently allocate resources in certain situations. There are diverse reasons why efficiency may not be achieved some of these are: Public and Merit Goods Many goods and services that we take for granted would not be provided for in an unregulated free market without government intervention. The legal system, defence forces, schools, roads and health services are just some of the benefits we receive due to this intervention. Admittedly the private sector has recently become involved in some of these but all are still very much regulated by the government. A pure public good is a good or service which can be consumed by everyone and from which no-one can be excluded, national defence and light houses are two examples of this. A public goods are non-rivalry i.e. one person's consumption does not reduce the amount available for someone else and they are non-excludable i.e. no-one can be stopped from using the good or service. The problem with public goods is that payment cannot be regulated at the point of consumption. This introduces free riders, which is somebody who consumes a good or service without paying for it. This problem is particular to public goods because of the difficulty in regulating payment at point of consumption. Due to this the service would not be provided for in an unregulated market hence the requirement of government intervention. ...read more.

Middle

Some of this amount of course will be the result of inflation, but with that being about 2% it by no means accounts for a rise of over 25% in government spending. Public spending recently has had to follow a frame work, the principles of which are: * Spending has to be consistently planned for the long-term; it must be prudent and has to be transparent and open to scrutiny. * It is to be achieved by using policy outcomes, must fit with the long-term goals of government. * Incentives will be in place to ensure departments create long-term plans and work in each others interests. * Capital assets will be costed appropriately to allow the most efficient long-term investment. The Government has also set itself Fiscal Rules for the economy which it must abide by in the 1997 Financial Statement and Budget report. "1.19 Stable public finances are the second key requirement for long-term economic stability. The Government's fiscal policy will be guided by two strict rules: * the golden rule: over the economic cycle the Government will only borrow to invest and not to fund current expenditure; and * Public debt as a proportion of national income will be held over the economic cycle at a stable and prudent level." ( The Stationary Office,1997) It was hoped that by introducing these controls on government spending and borrowing, the British economy would see an increase in investment and a reduction in borrowing. By defining between current expenditure and investment for the future, the government is able to insist that current spending be met by the generation that is currently using these services by means of taxation thus allowing investment for future generations to be financed by borrowing. The golden rule will be met if current spending is paid for by taxation and other government receipts: in other words, if the public sector current account is in balance, or in surplus, over the economic cycle. ...read more.

Conclusion

As consumers we measure our wealth in pounds or how many televisions we have or what sort of car we drive. If we continue to measure our economic growth by such measures as GDP then Nationalisation will provide more drawbacks than advantages. Nationalisation inevitably leads to inefficiency within the nationalised industry, although economies of scale will initially look more efficient on the surface, the lack of competition will eventually lead to inefficiency. Goods and services will be limited to a greater extent and the quality will fall, which will result in fewer exports and more imports as a better range of goods of better quality will be available from other countries, indeed due to the inefficiency of nationalisation they may even be available cheaper. Privatisation on the other hand brings the advantage of choice and the most efficient distribution of resources. It gives everyone the opportunity of ownership and the financial rewards that that may entail. Efficiency levels should be at there optimum as producers try to reduce their costs and maximize their profits. However profit maximization will often be to the detriment by way of increased social costs. Industry totally devoid of government intervention will supply to a market irrespective of the commodities merit or de-merit value. Unlike the nationalised industry where profit is low or non-existent, profits from private investors can be invested in future development and technology. Again all these benefits are assuming that material goods are an advancement for society. In conclusion an economy with the benefits of privatised industry, providing the goods and services with a range of choice would appear more advantages to the economy and the consumer. Particularly if the government was to enforce controls and regulations on monopolies and oligopolies. Also ensuring that de-merit goods were unavailable or heavily taxed and merit and public goods were provided cheap or free at the point of consumption for use by all. A redistribution of income via the taxation system would also be beneficial to those lower classes that will continue to be exploited. Of course negative externalities should be eradicated wherever possible by way of government intervention. ...read more.

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