Why government's??

As many of his ilk, Reed in the 'Twenty Principles of Sound Public Policy' fails to distinguish between the negative and the positive roles of the government. Most critics of the government fail to appreciate the positive role of the government, i.e. the role of the government in complementing markets or in compensating for the errors of ommissionof markets. Such market complementary operations are essential for the smooth functioning of an economy... An illustration is the provision of income-generation schemes for famine affected people by the government, which has been shown to be an effective method of famine prevention.

There is room for government mediation even in the normal functioning of markets and this is provided for through the 2nd theorem of welfare economics which states that any pareto-efficient allocation of goods can be sustained by a set of prices in a competitive market equilibrium... The allocation of goods is left to an agency likethe government and to its perception of what equity is. There is no such thing as a perfectly competitive market. In reality markets are plagued by externalities, assymmetric information, imperfect-competition, existenceof a class of non-excludable and non-rivalrous goods (public-goods, ex:defence)which may lead to their non-existence or their failure. In cases of market failure there is room for the existence governments and their market-excluding operations to compensate for the errors of commission of markets. However, even though it is possible to think of a system of public intervention which will lead to a pareto-superior outcome, in reality government's and PSE's are not models of efficiency and its is generally more beneficial to allow the private provisioning of such goods (except public goods) subject to regulationby the government. In case of a market failure, should a government take over the provisioning of the good or not?! For this the 'Double Market Failure criterion' is really useful! A government should only interfere when a)the existence of market failure and itsrecurrence has been credibly proved, and b) there is absolutely no scope for a more efficient outcome by private provisioning of the good, subjectto government regulation.

Even free markets need a regulatory and judicial framework for theirsmooth functioning. The fulfillment of contracts cannot be left to the spirit of cooperation or the 'fundamental-goodwill' of free people. Only the disincentive of judicial action and a credible judicial framework can lead to the smooth functioning of markets.

The government plays an important role in initiating, creating, moulding and sustaining markets. An example is Japan, where the ministry of InternationalTrade and industry (MITI) undertook considerable R&D activities earlier in 20th century and provided the enormous technical know-how and the phenomenal technological and knowledge base which enabled Japanese firmsto excel in the production of cars and the like and gave Japan the competitive edge they have in global markets.

Thus economists while criticizing the negative role of the government should also account for the positive role of the government. The need for intervention in the provision of social infrastructure (health, education, etc.), public goods and certain types of public infrastructure shouldn't be overlooked.