|
On 5th July 1883, Sir William Wedderbum while making a presentation to the East Indian Association in London observed: "The problem was how to supply him (the farmer) with capital without loan becoming the cause of his ruin."
A true concern of a civil servant of yore for the good of a common man! That's indeed what even the modern public finance theory states: government should do no harm. According to Rosen and Weinberg (1997), even in today's world of privatization, government remains an important, if not dominant, player in the world's economies. So long as the market economy is working satisfactorily in meeting the demands of consumers at the lowest cost, there is of course no need for the government to intervene with its investments. But when consumer demands go unmet or costs are prohibitively high, there is a just need for a government to intervene.
It is commonsensical that markets work well so long as the `self-interested consumers' and `supplier-companies' absorb all the benefits and costs of their economic transactions—i.e., when an individual farmer's demand curve measures all the benefits of the cost of capital being borrowed and a lender's cost curve captures all the costs associated with its supply, the market functions without any frictions.
However, when some benefits and costs are ignored or over-stated by market participants, markets are prone to fail in providing an efficient allocation. That is where an extra-market institution needs to be created as a means to account for those `externalities'. And that is where government has a potential role to play. |
