Public Sector Intervention & Economic Policy
Public Sector Interventions: Economic Policy
Economic policy refers to the set of measures and instruments that the state uses to intervene in economic activity and promote the country’s progress.
The Existence of Public Goods
Ideally, the market should supply a sufficient amount of goods and services that society demands. However, this is not always the case. There are situations where the market fails to meet certain social demands. These are often referred to as “unprofitable goods”.
State Interventions in the Supply of Public Goods
When private initiative produces fewer goods and services than society demands, the state provides them for reasons of public interest. The supply of public goods and services manifests in several ways:
- Direct production (justice, police, army, education, etc.)
- Acquisition from private companies for free distribution (lighting, roads, bridges, etc.)
- Partial grants for acquisition (healthcare, social housing, etc.)
The annual coverage of public goods and services is reflected in the state’s annual general budget.
Externalities
Externalities, or negative external costs, are the costs of an economic activity that fall on people other than those who carry out the activity. Conversely, there are also positive externalities, or external benefits. These are benefits to other companies or individuals resulting from an economic activity.
Externalities are the consequences of an economic activity that affect people other than those carrying out the activity and are not reflected in the prices of the goods and services produced.
Unequal Income Distribution
The market only expresses the preferences of people with an income level that allows them to pay the price of goods and services offered by companies. Those with less purchasing power can hardly communicate their needs to the market. People with higher incomes are favored if the state does not intervene, and the market only benefits certain people with high incomes.
Economic Policy and Income Redistribution
Economic policy not only aims to stabilize the economy and minimize the negative effects of fluctuations. Another important objective is to reduce inequalities in personal or geographic income distribution by establishing laws and measures to redistribute income.
What is the Welfare State?
The welfare state is a particular case of a mixed economy characterized by recognizing basic rights for all citizens. Key features in the Spanish context include:
- Healthcare: Regardless of income level, everyone in Spain is entitled to receive healthcare.
- Education: Democracy would not be viable if the values characterizing the United States were not transmitted. Therefore, education is a right and an obligation.
- Housing: Everyone has the right to decent housing. Measures are taken to reduce housing costs through subsidies and tax benefits.
Types of Benefits
- Universal Benefits: Offered to the entire population for free, requiring only a request from the beneficiary.
- Contributory Benefits: Require a prior contribution, such as unemployment benefits.
- Social Benefits: The most robust, as the beneficiaries are groups with little or no resources.
Present and Future of the Welfare State
- Greater Control over Public Spending: Reducing costs and increasing revenue is not exclusively a concern of the public sector. A state that spends more than it earns has limited possibilities to foster economic growth.
- Flexible Labor Market: Flexibility refers to the labor market’s ease in adapting to economic contingencies.
- Controlling Inflation: If prices grow disproportionately each year, the economy becomes unstable. People lose purchasing power, consumption decreases, and companies lose competitiveness.
- Privatization of Public Companies: Free competition means competing on equal terms, without any company having advantages over others. Consumers reward companies that best meet their needs.