The Microeconomic objectives of government

These are the policies which are concerned with the allocation and distribution of resources to maximize social welfare.

1. Allocation policies

The major objective of government is to achieve pareto efficiency in resource allocation.  An economy is said to be Pareto efficient when it must be impossible to increase the production of another, or to increase the consumption of one household without reducing the consumption of another.  Such situation results when the following three conditions are satisfied:

a)     The given stock of resources must be allocated in the production of goods and services in such a way that no re-location can increase the output of one good without decreasing the output of any other.

b)    The combination of goods and the proportions in which they are produced must be in response to tastes and preferences of the community - i.e. the goods produced must be the ones that the community wants.

c)      The distribution of goods and services must be in conformity with consumers' preferences, given their tastes and incomes.

2. The distribution function /policy

The overriding aim of the strategy is to promote equity - that is to achieve a  "fair" distribution of income and wealth.  For this purpose, budgets are usually designed to impose higher rates of taxation on higher incomes and to try and secure a fair distribution of tax burdens in the community.

On the expenditure side of the budget, spending can be channelled into areas (such as health, education, and social security benefits), which directly benefit the lower income groups.