HOW PUBLIC SECTOR WORKS.
Economics actors can be defined as the participants in the economy sector of a country that influences decisions in the economy often to do with allocation of resources and other decision making areas.
Public sector is a one of the major economic actors in every economy, in many countries it has been seen to contribute an average of 50% of gross domestic product of. An effective working public sector encourages a lot of growth in the economy since it provides an environment that is conducive for all economic activities to be carried out efficiently and effective (Gregory, 2010). Besides the public sector, there are also other economic actors which work hand in hand with public sector some of which include; households, financial institutions and corporations or firms.
We are going to put our focus on macroeconomics in an attempt to explore the impact that the public sector has on the economy of a given country. It is worth noting that macroeconomics focuses on the aggregate output, employment level, inflation and economic growth of a country. The public sector is usually headed by the government. It involves making decisions on areas such taxation, government expenditure and most importantly it is associated with availing social services that private oriented corporations are not willing to offer.
Public sector faces challenges such as opportunity cost, price mechanism and allocation of factors of production. Opportunity cost can be defined as the value of the best foregone alternative when a choice about allocation of resources is made. This sector faces the problem of opportunity cost since, anytime there is a decision to make there must be competing areas that need almost equal attention which are of similar importance and even similar urgency. For example, foregoing building of roads to building hospitals. A choice has to be made between these two competing sectors which are equally important and that choice is what we are terming as opportunity cost. Public sector therefore faces this challenge anytime a decision concerning allocation of resources is to be made.
Price mechanism is quite a complicated area to satisfy in an economy, the public sector is always involved in this area since it comes in through taxation thereby raising prices of products. Care need to be taken so as not to affect the demand of products as a result of very high taxes on those products. This usually calls for the sector to learn about the elasticity of the products so as to impose taxes effectively. Imposition of taxes always has a negative effect on price mechanism especially where forces of demand and supply are responsible in determining the prices (Thompson, 2006). An introduction of taxes will automatically cause a rise in prices. In addition, the public sector may decide to set price floors where it needs to raise prices above equilibrium prices as dictated by market forces with an intention of protecting the producers so as to guarantee their continuous production. On the other hand it may set price ceilings so as to avoid overcharging of consumers by producers.
Allocation of factors of production is also another area that is of great importance to the public sector. This sector usually engages in a lot of investment for example in hospitals, schools and other income generating sectors. It therefore faces a challenge of resources allocation since all these areas require to be funded from this sector and each one of them has an impact to the society (David, 2009). There is need of well thought decision because as much as funds are supposed to be directed to areas generating more income, others areas with low returns also need to be funded so as to improve them and have them also contributing to the economy as well.
Actions taken by the public sector usually affects other economic actors either positively or negatively. This means that they all have a relationship in one way or the other. For instance, high taxes will reduce households’ consumption due to high prices in case of product taxing and where taxes are levied on income of the household, their disposable income will reduce thereby decreasing there expenditure. Households are usually consumers of products offered in the public sector and therefore both sectors are to some extent dependent on each other. Where the public sector wants to reduce the consumption of a harmful product it increases taxes on that product thus affecting the household sector. On the other hand where it needs to encourage consumption of a product it reduces the tax levied on that product.
Public sector also affects corporations both positively and negatively. In case there are subsides or reduced taxes, corporations are encouraged to produce more thereby raising their profits level as a result of reduced cost of production (Thompson, 2006). On the other hand with high taxes, production cost is increased resulting to corporations producing very low output. Low output means shortage in supply which raises prices and not forgetting that, low production means high level of unemployment in the economy.
In conclusion it is evident that all economics actors are interrelated and they all have some effects on each other. We have focused on public sector in our discussion and we have been able to point out how it affects. It is also clear that public sector faces decision problems as far as opportunity cost, price mechanism and factors of productions are concerned (Daniel, 2006). With both human resource and monetary resources in place these decision can be made effectively there by facilitating the economy to grow in all sectors.
Thompson, Damian ( 2006). “Here’s how the world works”. The Daily Telegraph (London).
Gregory Scoblete (2010). Will Free Markets Give Way to State Capitalism?, RealClearPolitics,
Quinn, James (July 10, 2010). “The West Should Fear the Growth of State Capitalism”. The Daily Telegraph (London).
Daniel Altman (2008) In the span of one day, how does the world do business? Picador.
David M. Smic (2009) The World Is Curved: Hidden Dangers to the Global Economy Penguin Group USA,