1. Allocation: Using efficiency as a criterion, the government allocates resources to
those sectors having highest efficiency. However, as monopoly organisations/
sectors and other forms of ‘market failure’ produce market distortions, the
government must take this into consideration.
2. Distribution: the government tries to influence income distribution through
several means – taxes, social security, allowances, and free/subsidized public
sector services – thereby introducing both efficiency and equity in resource
allocation.
3. Regulation: the market economy works only if consumer protection, the rule of
law, access to justice exists in a country. Thus, as a regulator, the government
upholds the rule of law by legislating and enforcing the laws of contract, etc.
4. Stabilisation role: the above three roles – allocation, distribution and regulation –
affect the microeconomics of the country. By trying to control inflation, unemployment, etc., through the use of monetary, fiscal, and other economic policies –
which is a macroeconomic approach (see below), the Government establishes its
stabilisation role.
Of course, these four roles are interactive among themselves: e.g., changes in
fiscal policy (stabilisation role) affects taxation and public expenditure (allocation)
that, in turn, affect income distribution whether in cash or in kind (distribution role).
For example, the quantum of public sector services (education, health, etc.) is finally
dependent on fiscal changes.
2.2 Economics Applicable to Infrastructure
2.2.1 Selective Overview of Economics
The six subsets of economics which interest us when we are dealing with infrastructure are macroeconomics, microeconomics, engineering economics, welfare economics, resource economics and behavioural economics.
(a) Macroeconomics
Macroeconomics studies the economy at a national level where broad economic policies are considered. Factors such as interest, rate of return, inflation,
unemployment are considered. Macroeconomics also studies the economic
growth of a country, usually through the Gross Domestic Product (GDP) and
how the governments use policies to moderate harm caused by recessions.
(b) Microeconomics
Microeconomics represents the building blocks of the economics system as
firms/individual people/producing units and households. Households represent a
group of individuals sharing income so as to purchase goods, services or
commodities. This discipline studies the behaviour of (1) individuals when
they are faced with spending their money and (2) profit maximizing firms both
as individuals and against competing firms in the same market.
2.2 Economics Applicable to Infrastructure
37
those sectors having highest efficiency. However, as monopoly organisations/
sectors and other forms of ‘market failure’ produce market distortions, the
government must take this into consideration.
2. Distribution: the government tries to influence income distribution through
several means – taxes, social security, allowances, and free/subsidized public
sector services – thereby introducing both efficiency and equity in resource
allocation.
3. Regulation: the market economy works only if consumer protection, the rule of
law, access to justice exists in a country. Thus, as a regulator, the government
upholds the rule of law by legislating and enforcing the laws of contract, etc.
4. Stabilisation role: the above three roles – allocation, distribution and regulation –
affect the microeconomics of the country. By trying to control inflation, unemployment, etc., through the use of monetary, fiscal, and other economic policies –
which is a macroeconomic approach (see below), the Government establishes its
stabilisation role.
Of course, these four roles are interactive among themselves: e.g., changes in
fiscal policy (stabilisation role) affects taxation and public expenditure (allocation)
that, in turn, affect income distribution whether in cash or in kind (distribution role).
For example, the quantum of public sector services (education, health, etc.) is finally
dependent on fiscal changes.
2.2 Economics Applicable to Infrastructure
2.2.1 Selective Overview of Economics
The six subsets of economics which interest us when we are dealing with infrastructure are macroeconomics, microeconomics, engineering economics, welfare economics, resource economics and behavioural economics.
(a) Macroeconomics
Macroeconomics studies the economy at a national level where broad economic policies are considered. Factors such as interest, rate of return, inflation,
unemployment are considered. Macroeconomics also studies the economic
growth of a country, usually through the Gross Domestic Product (GDP) and
how the governments use policies to moderate harm caused by recessions.
(b) Microeconomics
Microeconomics represents the building blocks of the economics system as
firms/individual people/producing units and households. Households represent a
group of individuals sharing income so as to purchase goods, services or
commodities. This discipline studies the behaviour of (1) individuals when
they are faced with spending their money and (2) profit maximizing firms both
as individuals and against competing firms in the same market.
2.2 Economics Applicable to Infrastructure
37