Introduction: Market System and the Role of Government

The level of budgetary activities in a government is directly related to the economic system of which it is a part. In a command economy, where there is no private sector, budgeting is central to all economic and noneconomic decisions of the government. In a free market economy, such as the United States, the presence of a strong private sector, while limits the role of government, it is still substantial considering the size of the federal budget as a percentage of Gross Domestic product (GDP) that runs into several trillion dollars each year. Although not as high as the federal budget in percentage terms, state and local budgets also constitute a significant percentage of their respective gross products, running anywhere from a few million dollars for a small local government to hundreds of million dollars for a large local and most state governments. Therefore, to understand the nature of the budgetary activities in a government it is important to understand how the market system operates, its strengths and limitations and, more importantly, the role government plays in a market system. According to conventional wisdom, the more efficient the market system the less the role of government. In budgetary parlance, it means less government expenditures, less taxes, and less regulations. Ideally, if the market system could address all our needs and fully regulate its own behavior, there will be no need or very little need for government intervention, but that is seldom the case. A market system, by itself, cannot perform all the functions necessary to meet the needs of society nor can it fully regulate itself; hence, the need for government intervention. This chapter briefly discusses how the market system operates, the problems an unchecked market system creates for society, and why government intervention is necessary, including an overview of some of the measures commonly used to address the problems.