The Role of Public Sector in the Economy

The government plays an important part in the daily operations of the private market. Beginning with provision of infrastructure through which private sectors can conduct their business to rules and regulations governing these markets. The amount of income distributed differs from one country to the other (Allan and Scott 1981, p.914). However, all governments participate in the economy using the taxes collected. This paper is divided into four main sections. First part discusses the rationale for public sector, the second defines equality and efficiency in the economy while the third part explains how the public sector can improve equity and efficiency in the economy. The last section looks at the elements of inefficiency and inequalities caused by public sector.

The concept of equity and efficiency

The public sector comprises of organizations owned and operated by the government to provide services to the people. Just like the voluntary sectors in the economy, the public sector does not aim at making profits. The sector raises funds through taxation, fees and financial transfer from other levels of the government. The sector plays a huge role in economic development of a country. The private sector on their own cannot effectively operate in the economy as it is composed of people with different needs which may cause trouble to those who are not financially stable. The government therefore through the public sector builds infrastructure and provides services such as schools, hospitals, and other social amenities.  If there were no market failures in the economy, the market would offer efficient goods and services. However, due to the mechanism through which the market works, the economy experiences market failures hence the need for public sector intervention.

Economic efficiency arises when people gets the highest level of output from its limited resources. Every nation has natural resources, capital, and labor although the sizes differ. If these resources are used efficiently, a country can produce a maximum output which is known as economic efficiency. When this situation occurs, it allows the public to fulfill more wants than when the funds are distributed inefficiently. In addition to economic efficiency in the market, is equity which occurs when the resources of a nation are distributed fairy. Different people have different sentiments on fairness. Some tend to assume that market allocates output fairly hence oppose the intervention of the government while others believe the market creates an unfair distribution hence are in support of public sector intervention (Goldsmith 1995, p. 158).  The former is supported by traditionalist who favors a limited government role in the economy while traditional liberals hold the latter. Some economic systems allocation may be efficient without being fair while others are just without being efficient. Communities select different political and economic arrangements centered on the diverse opinions and estimates of efficiency and equity. The citizens of a country pay taxes to the government which is used to create income used in the providing public services. Equity and efficiency are the main measures used in the evaluation of a tax system (Connolly and Munro 1999, p.210). 

How public sector can improve equity and efficiency

The government has the mandate to intervene in markets to ensure they bring equality to all its citizens. The intervention aims at enhancing the allocation of market products among the people which is achieved through taxation. Second, is to ensure people in similar circumstances are treated equally and lastly, to consider the needs and outcomes for future generation such as ensuring they are not negatively affected by the activities of the present generation. The redistribution interventions is the role of the central government. In some cases, the redistribution is in the form of cash benefits which enables individuals to make their consumption choice in the market. Other times, the intervention is in the form of in-kind benefits through provision at no or low cost to ensure all can afford the said goods and services. Examples of government intervention to ensure equity is when it builds public schools and hospitals and charges little or no fee to ensure even the poor can access decent medical services and education hence bringing equality.

As discussed earlier, public sector intervenes in the market when there is a market failure. The situation occurs due to inefficiencies which are caused by five main causes; public goods, imperfect information, coordination problems, imperfect competition, and externalities or spill overs (Browning and Johnson 1984, p.12). Under public goods, the inefficiency occurs because one individual’s usage of a good or service does not inhibit anyone else from using it hence the existence of non-rival in consumption. Since there is no extra costs for an additional person to profit from the good, then, the market pricing mechanism changes which result in an incompetent provision of the good. Due to the circumstances surrounding provision of public goods, it is impossible for the private sector to deliver such services hence public sector intervention. Therefore, the government intervenes in the economy to create efficiency by providing public goods such as building roads which can be used by all people in the country for provision and production of services and goods hence increasing efficiency (Vedder and Gallaway 1991, p.12).  

Externalities occur when the consumers or producers do not bear the full benefits or costs of an activity. When an activity has implications on third parties, these effects are called externalities. Specifically, they occur when there is a difference between the private benefits or costs and the total socially collective benefits or costs of the activity to the society at large. Individuals performing a certain activity will only consider the private costs and benefits hence their decisions are not collectively efficient. For instance, river pollution caused by an industrial firm affects third parties such as water companies hence causing negative externalities (International 2017, p.38). The market becomes inefficient because the extra cost to the users of the river is not taken into consideration by the industrial company when deciding on the level of discharge into the river. The public sector, therefore, intervenes in such situation to eliminate the negative effects caused by the fish, water plants and human users of such a river. Hence, the government through the imposition of rules and regulation intervenes in the economy to eliminate externalities hence increase efficiency.

For the market to operate efficiently, information should be available to all participants for rational decision making. Although sometimes the majority of markets can function without all parties having perfect information, for some goods and services, lack of perfect information may prevent people from making rational decisions. Imperfect information, therefore, creates market inefficiency which is corrected through government intervention. The public sector in such scenarios will provide the information necessary for decision making to ensure all parties have access to the same level of knowledge of the problem at hand. Additionally, the government can intervene in cases of imperfect competition by minimizing the barrier to entry in industries with monopolies or giving tax incentives to encourage new firms. Inefficiencies occur in many ways, and it’s through those ways that the public sector can improve efficiency and equalities in the market.

Elements of Inequalities and inefficiencies associated with public sector

In some instances, the public sector efforts of solving market failure cause inequalities and inefficiencies through the allocation of resources which in turn causes a decline in economic welfare. Such situation occurs when the public sector employees lack motivation and incentives to improve services and cut costs hence leading to inefficiencies. For instance, the government offices may be prone to overstaffing but are reluctant to redundancy due to political costs associated with unemployment. Additionally, political interference may cause inefficiency especially when decisions are made for short term political gains rather than sound economics. Other elements of inefficiency caused by the government are the distribution of resources to areas that are supporting the government to entice the people in the area to continue the support. The change of government also leads to inefficiency because different governments have different approaches and political initiatives.


The role of public sector in the economy is crucial as it helps bring a balance between the rich and the poor. The government is elected by the public who wishes it to act on their behalf. Therefore when the government interferes in the market it should be for the good of its citizens. In a realistic market, there are existence of externalities which bring about inefficiencies. The private sector can only make the situation worse hence the government participation in the market is necessary. Although in some cases public sector causes inequalities, its role is vital for the efficient operation of the market.


Allan H. Meltzer, " Scott F. Richard. (1981). A Rational Theory of the Size of Government. The Journal of Political Economy. Retrieved from http://

Browning E K. and Johnson W R. (1984) The Tradeoff between equality and efficiency.

Journal of political Economy

Connolly, s., " Munro, A. (1999). Economics of the public sector. London

[u.a.], Prentice Hall Europe.

Goldsmith A. A. (1995) Democracy, Property Rights and Economic Growth. The journal

of Development Studies 32(2): 157-174

International Monetary Fund. (2017). Finance and Development. Back to Basics. Economic Concept Explained. Retrieved from

Vedder R. and Gallaway L. (1991) The equity-Efficiency Debate, The journal of

Private Enterprise, vol.15, No. 1: 1-17

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