The role of government is vital in all sorts of economic systems. One of the main responsibilities of a government is to impart the facilities of education, health, security, recreation and transportation. Government endeavors to save national economy from extreme unemployment and deflation and achieve high economic growth adopting the policy of equal distribution of income generating sources among the people. The government collects revenue from the people and mobilizes for establishing infrastructure for further development.

The role and scope of a government varies in economic systems. The role of a government is exceedingly dominant in a capitalist country. Modern capitalist economy is a mixed economy where there are public and private sectors. In socialist countries, most of the productive activities and factors of production are under the control of government. So government plays main role in business and economic activities.
In the earliest phase of human society, there was less role of government in the economic activities. During that time, there was less control of government in the economy. In the middle age, government started to control the economic activities. As a result of that in the 19th century, there was uncontrollable voice against the control of government. There was development of “Laissez faire doctrine”. Then again, the role of government started to decrease.

Government is a very powerful institution, for it creates a favorable business environment by providing subsidies as well as low cost financing etc. Though economists like Eugen V. Schneider neglect the role of government and limit only on formation and implementation of law and order, business need government help in foreign trading as well as other big projects. Shaping, directing, controlling and promoting are few basic functions of the government in business. In the case of mixed economy, there are mainly four roles of the government:

  1. Observation Role of Government

The observation role of the government is required in case if the business is run by individuals or corporate and some umbrella is required for conduction. Under such condition, government becomes top level observer and regulates where it is necessary.


2. Investor Role of Government

The role of government is sometimes that of an investor. In the productive sectors, which are in shadow, government can be the investor. The main objective of investment in such sectors is to promote private sector and make them strong. In the case of infrastructure development, the government plays the investor’s role. The government again plays the remaining two key roles i.e. regulation and promotion.


3.Regulatory Role of Government


Government is that institution, which controls the whole economy of the country. Mainly, government controls private sector business through monetary and budgetary policies. In practice, we notice the effect of annual budgetary speech in market after few days of its announcement. Government also does administrative or physical control and seeks to ensure that private investment and production in industries, and the use of scarce resources conform to government’s basic social-economic objectives.

After the industrial revolution and first world war, business organisations felt the necessity of government’s role in business. To keep the business firms within the boundary and to control their activities, governments of world began to introduce new rules and regulations. Those were essentials for

-Keeping balance between plan, speed and growth

-Supplying facilities like power, communication, water supply etc

-doing sponsor in economic growth

-Controlling market failure

Government functions can be classifies as given below:

-Corrective and inductive control

Corrective control refers to actions done to escape from penalties. For example, tax should be paid in time otherwise fine will be charged. Inductive control means giving rewards for doing certain specific works.

-Direct and indirect control

Government can control price by two methods. One is directly by fixing the price and indirectly by changing the tax rate.

-Effective Competition

Depending on the effects of competition, rules and regulations may create competition, a means of setting standard of competition or to supplement competition.

-Promotional and regulation controls
It includes priority to small plans, reduction of geographical discrimination and provision of incentives and subsidies. Government focuses on these aspects and lays down the limits for the private enterprise. In the absence of government intervention, monopoly replaces competition. Because of which, small firms cannot be operated. So big firms monopolize price of goods by decreasing supply. The regulatory functions of government includes:

-Restrain on private sector.

-Controlling big business monopoly.

-Development of public enterprises as alternatives of private enterprises.

-Maintenance of proper socio economic infrastructure.

-Use of anti trust law to control unfair competition.

Hence, all the characteristics of competition cannot be found. There may be some characteristics of perfect competition at some necessary conditions. Some necessary conditions, where governments regulation is required are given below:

-In case of imperfect competition

-Market structure fails

-Monopoly should be controlled

-Unfair competition should be controlled

-In case of negative externalities

The firms have to give positive results to others.
Firms, primarily, consider about their own benefit. Therefore, government’s role is essential for the welfare of the society and nation.


4.Promotional Role of Government

The main goal of promotional role of government is to stimulate private sector, in order to increase social and economic overhead. As a result of that economic growth is possible if there is:

-Increase in effective demand

-Increase in private investment

In the absence of social and economic overhead, the capital output ratio will be decreased. So, government promotes this overhead.

Government play a vital role by providing fund to industry, granting various incentives and providing infrastructure facilities for the development and growth of the industry. It invests and provides fund in different types of industries. It provides financial support to the industry, if needed, for the government it is the last source of finance. It promotes business sector by granting various incentives and providing patent facilities, subsidies, tax free holiday and loan at low interest rate or even at zero percent interest rate, depending on the nature of the business activities.

In Nepalese context, government provides facilities to farmer through agriculture development bank by introducing various programs. Farmers are encouraged and supported by the government with the means of these kinds of policies and facilities.