The fact is that, nowadays, welfare provision tends to be more advanced in the countries with stronger and more developed nations, poorer countries generally have more limited welfare services.
Now that this term has been defined, it is necessary to focus our attention in the main functions of the modern state:
The economic functions of the modern state come from people’s needs and in general by the society. It means there is a demand for goods and services that should be provided, but we have to evaluate the composition and derivation of the demand.
Besides, what is more relevant is analysing the market mechanism, why the public sector is required and why it is wrong to leave the entire economy for the private sector.
In a perfect competitive market we can find a situation where the set of factor prices and the initial distribution of income ,it is not possible, by reallocating final output between individuals to make someone better without making someone else worse.
If we analyse the current market, we will realise that it is almost impossible to achieve, because this reflects the presence of some defects that cannot lead to perfectly competitive market. It is unable to operate efficiently if it if is left to itself.
These limitations can explain the concept of market failure that includes factors like externalities, public goods, and obstacles to free entry in the market, level of employment, price stability, economic growth and social values that require regulations by the public sector.
In order to correct the market failure the government has to use the allocation, the distribution and the stability functions with policies that can compensate its effect.
To explain how the public sector uses the allocation function we have to illustrate the concept of property rights, externalities, free rider, non-rival consumption and non-excludability.
When someone has property rights, he becomes the owner of some commodity and he can exclude the others from using it. This is typical for private goods or services, like clothes ,food and cars.
There are different commodities that cannot be owned by any single individual, because the benefits of the property are available for everybody. These benefits represent externalities, where consumption cannot be individual, or when there are social costs for economic activity, which are not paid by the producer. Typical example of positive externality could be a lighting system or the roadway for the city.
The free rider is a consumer that will not pay for a common collective property; this is an example of social good provided by the government.
The free rider will think his self-interest and when there are other consumers that believe in the same way, nobody will cover the cost of such goods. This is one of the reasons why the private market fails and the government has to supply social goods.
Public commodities are usually non-rival in consumption; it means that the marginal cost of adding another consumer to use the goods is zero. However the cost of providing the faculties should be covered and it is necessary to establish the reasonable size for the facilities. For example the construction of a bridge and its use, it’s non-rival in consumption, but the public sector should know before the preferences of the consumers, and establish the amount that they have to pay.
The concept of non-excludability is typical for social goods due to the characteristic of the commodity, because it is not possible to exclude beneficiaries, or it could be very expensive. In this case of a pure public good, for example the national defence, there is complete non excludability; nobody can decide to exclude himself from being defended.
Pure public goods are rare, usually they have a private component inside and in general they produce externalities.
Anyway the possibility of exclusion is not so simple for many reasons, like the technical characteristics of the good, or the cost of the exclusion. The producer usually decides if it is possible and suited to apply. A toll motorway through a complex monitoring system can solve the problem of traffic congestion in a city (ex. Toll motorway in central London). Exclusion from a public good in this case is possible, but its advantages should be more than its costs.
For all these reasons the government should provide social commodities with the allocation function of budgetary policy. Social goods are financed, produced and made available by the government; the cost of such production is paid by taxpayer or by the user.
The public sector regulates the allocation process of the marker through the imposition of rules, limiting the freedom of the private market (ex. Reducing monopoly elements), or protecting the public interest from unregulated externalities.
The distribution function is used by the public sector to adjust the distribution of income, wealth, education, in accordance with what the society consider a fair state of distribution. This function allows the government to have direct control of services considered very important for general welfare. It has an essential rule in determining taxes.
Distributional purposes are established by following an efficient use of resources, but establishing the right distribution of income and welfare is a complex problem. It usually depends by the economy structure of the country that leads the application of the policy.
There are many fiscal instruments of distribution policies, each one with its effect.
The most common are progressive taxes used to finance public services, or progressive taxation of high-income with subsides and goods purchased for low-income people.
Nowadays we can see many differences between the most developed countries in the use of the distribution function due to political choices.
Planned socialist economies (ex. URSS or Eastern Europe), with a strong central power, usually have a particular emphasis in these policies, with the main purpose of an equal redistribution of income and welfare among people. These politic conditions do not allow the private market to manage the normal function that it has in a market economy.
The public sector usually controls the whole economy, not only in the case of market failure; it provides an equal allocation, distribution and stabilisation of resources.
Capitalist economies have a different approach of policies management; it mainly depends by the political trend followed by each country.
In the USA, one of the most developed capitalist economies, there is a particular emphasis for the free market, and the government expenditures are a reduced percentage of GNP .The Health System is structured with insurance policies that people pay by themselves; the public sector does not ensure a national health cover. This could be a problem for those who wish health protection, but unfortunately they do not have enough money to pay insurance.
We know perfectly that the tendency of the economy of each country is characterised by periods of inflation and unemployment, price stability, and economic growth.
The main instruments of stabilisation policy are the fiscal functions.
The central banking system can control the money supply, in terms of adjusting exchange rates, increase/decrease liquidity, interests rates, level of demand, and coordinate the economic decisions of the private sector. The government should provide the conditions that lead the system into stability, even if the monetary policy has an indirect effect on the level of demand.
Fiscal policy has different instruments to achieve economic growth and stability; tax reduction and changes in the level of deficit, can directly influence investments and private expenditure.
Some authors use a different approach is the analysis of the economic policy; the public sector can provide an insurance function. This includes pension, health and unemployment insurance.
Obviously we can allocate this role to the stabilisation policy.
We have already considered above the different ways of application of the fiscal functions due to political policies.
The current debate in Spain, concerning the reform of the allocation, distribution and stabilisation functions, it is actually one of the main commitments taken by the Government in power at the moment.
The concept of allocation function is changing; there is actually a privatisation of public goods and services. This is a delicate question, because sometimes an increase of economic efficiency does not mean an improvement of the service.
The distribution function has been changed with the introduction of new tax rates that should encourage economic investments of the private sector. This means that in the short-term the economic position of low-income consumer will not be better, due to the lower public expenditure.
With the introduction of the new currency, the Euro, Spain has made worse its monetary and fiscal policy and mostly its stabilisation function.
Nowadays, European Union has this function that will be the same for all the countries of EU; there are many differences among them, and the economic policy should have positive effects for the whole Community.
With this short analysis of the modern state’s fiscal functions, we can recognize the difficulties to apply these policies. Governments exists to deal with a large number of different problems, and to perform with a large number of different roles; they are always separate from one another and which frequently conflict. Government intervention does not always bring a perfect allocation of resources: the instruments used generate other inefficiencies.
