The modern economy is a mixed system in which public and private sector forces interact together. The economic system is neither public nor private, but involves a mix of both sectors. We cannot deal with public economics only; since the public sector operates in interaction with the private, both sectors enter the analysis.
1. Need for Public Sector.
Itâ€™s important to note that the market mechanism alone cannot perform all economic functions. Public policy is needed to guide, correct, and supplement it in certain respects.
The reasons behind the need for public sector are:.
1) The claim that the market mechanism leads to efficient resource use is based on the condition of competitive factor and product market. So, there must be no obstacles to free entry and consumers and producers must have the full market knowledge. Government regulation may be needed top secure these conditions.
2) It is needed where competition is inefficient due to decreasing cost.
3) Government protection and its provided legal structure are needed for contractual arrangements and market operations.
4) Even if the legal structure is provided and barriers to competition are removed, the production or consumption characteristics of certain goods are such that they cannot be provided for through the market; market failure will show and require corrections by the public sector.
5) Adjustments in the distribution of income and wealth results from the market system are required by the social values.
6) The market system in a highly developed financial economy does not necessarily bring high employment, price level stability, and desired rate of economic growth. Public policy is needed to secure these objectives.
7) Public and private points of view on the rate of discount used in the evaluating of future consumption may differ.
2. Major Functions.
Tax or expenditure measures may affect the economy in many ways and may be designed to serve a variety of purposes; several more or less policy objectives are also needed.