Government's Role in the Market?
Market economics: role of gov offering goods and services
For many essential goods and services, the government becomes a player in the market and offers these goods and services at a controlled price e.g., transport, hospitals etc. Alternative is that the government lets the market provide these goods and services but incentivises them in different ways. How do you assess the two different approaches keeping in mind that any government intervention in general leads to inefficiencies in the market.
The above questions from OP makes for an interesting exploration about how does one think about government intervention in markets. Below is my stab at a meandering discussion of the adjacent topic.
How does the govt participate in the market ?
The government sometimes participates in the market directly. Some examples as OP mentioned are transportation, education, healthcare and running the military. The government also runs 365 PSUs. Another way that government participates in the the market is indirectly. From my POV, there’s varying degrees of indirectness. The most focused way is by either doing a public procurement or contracting process. On the other hand an indirect manner is by controlling monetary policy (like the government cutting interest rates to boost consumer spending or the endless GST popcorn drama) or with regulations (like MRP and rice export bans).
Another way of thinking about the indirect participation of the government is where the government pushes the buttons in the complex system we call economy. America, for example subsidizes demand, it has foodstamp programs and education assistances, etc. This results in higher consumer spending power and a strong domestic market. China on the other hand subsidizes supply with manufacturing and export incentives. This has (partially) contributed to its manufacturing dominance with lower production cost and high export competitiveness.
Coming back to India, I don’t think the blanket premise that market intervention leads to inefficiencies in the market is completely correct. There are certain scenarios where government intervention is the most optimal policy :-
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There is no real market. The government has to do rural electrification since private players probably don’t want to invest. Same is the case for rural primary healthcare. Fundamental science research also falls in this bucket.
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National security. It makes sense that the government has to run the military since national security is priceless.
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Natural Monopoly. Railways and other infrastructure and utilities have high initial fixed cost and tend to become monopolies.
How should the govt think about govt intervention (ideally)
To start off, I often get the sense the reducing government intervention from status quo is talked about in terms off clipping the government’s wings. I think it is better expressed as a way for the government to be disciplined, get focused on what matters, play to its strengths and specialize in what it does best.
Sarthak gives a great example of the relative strengths of the government in his class. The government is good at mission mode kind of activities like eradicating polio, but still struggles with programs like swacch bharat that take sustained effort and focus.
The government should ideally think about and highlight unit level details about the economics of various projects. Have they considered different approaches? How much is it actually costing to supply water to each house in bangalore? How long is that new electric transmission equipment going to last ? Are there any long term liabilities for the project. Details like this really puts the actual cost being borne into perspective for citizens.
Government intervention should ideally happen considering a strong implementation aspect. I had to read Ajay Shah’s essay “A country is not a company” for the GCPP course and had a big heartfelt disagreement about it. Fundamentally a country is like a company in that it is a complex system. We need CEO type competent people who actually can prioritize the goals of the complex bureaucratic system like city municipality boards and run it in an efficient and innovative way.