1. The Role of Government Policy Policy is important because it affects allaspects of peoples lives Economics is a fundamental tool for assessingthe effects of policy Economics can explain how policy works andhow it affects peoples behaviour Economics can help to distinguish betweengood and bad policy

2. Government has four main roles in amarket economy1. To pursue an efficient allocation of resources2. To achieve an equitable distribution of income3. To make and enforce laws to protect property rights and protect consumers4. To prevent excessive inflation and unemployment 3. ..and has four main tools to do this1. Revenue gathering Taxation Fees for service2. Spending Subsidies to the public Direct purchase from the private sector Direct provision to the public3. Regulation4. Information provision 4. Government provision must pass five tests1. Is it necessary? What would happen if there were no intervention?2. Is it effective? Will it actually do what was intended? What are the unintended consequences?3. Is it equitable? Who bears the costs and benefits?4. Is it efficient? Do the benefits exceed all the costs? (productive efficiency) Will resource use be distorted? (allocative efficiency) Will it create incentives to technological change? (dynamic efficiency?5. Is it the best option (including doing nothing)?