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Appendix 1- Role of government

Government intervention may be justified where market failure results in the market not delivering the best outcomes for society.

From an economic perspective, freely functioning competitive markets are generally accepted as providing the most efficient means of allocating goods and services to maximise well-being and help ensure the efficient production of a good or service. Government intervention may be justified where market failure results in the market not delivering the best outcomes for society. Potential market failures include:

  • the existence and use of overwhelming market power or monopoly power
  • inadequate information to inform good decision making
  • the market not taking into account external costs and benefits (known as externalities)
  • situations in which the market is likely to lead to an underproduction of public goods, such as schools and infrastructure, without government intervention.

Intervention may also result from service needs and be justified to address distributional or equity concerns22. Governments typically intervene in economic matters to address market failures or distributional and equity concerns by:

  • providing regulation that promotes appropriate business operations and standards, while seeking to limit the regulatory and taxation burden on business23
  • providing or regulating key infrastructure such as transport, communications, energy and water infrastructure, that assists and enhances business competitiveness24
  • ensuring adequate access to services and amenities25
  • removing barriers to entry and trade, and ensuring competition
  • providing information to promote informed business decision-making
  • supporting education to increase workforce skills and qualifications26
  • boosting the innovation, sharing and absorption of new technologies27 – there are typically ‘public good’ benefits arising from research and development (R&D) and consequently, businesses may under-invest in R&D during normal market conditions.28

The impacts of an emergency or economic crisis are many and varied. In considering economic recovery, the primary role of government is to work alongside businesses and the community to revitalise the affected economy, including helping to address the consequences of an emergency or economic event on individuals and households, businesses, industry, tourism and the broader economy29.

The growing frequency of natural disasters in Australia is resulting in a substantial increase in public funding for relief and recovery activities, including economic recovery. This in turn has led to greater scrutiny of the nature, level and sustainability of direct support for affected businesses and communities, most notably exemplified by the Productivity Commission Inquiry into Natural Disaster Funding Arrangements30.

In its report, the Productivity Commission argues that the case for government assistance to businesses and primary producers after a natural disaster is weak. The basis for this view is that businesses are responsible for managing the risks they face, including natural disaster risks. Viable businesses should be able to manage these through market mechanisms including financial risk management and business continuity planning, insurance for machinery and buildings, business interruption insurance to offset any loss of revenue, and accessing credit through financial institutions. Separately, in its report on Transitioning Regional Economies, the Productivity Commission argues that there is a legitimate role for government in creating economic and community resilience through support for industries or sectors in which a particular region has a comparative or competitive advantage. However, it also noted the risks of government subsidising inherently unviable industries in such circumstances.31

The Productivity Commission highlights that the primary onus is on businesses to manage risk, and that market mechanisms exist that enable businesses to do so. However,, the government can support decision-making by businesses and communities to strengthen their preparedness for disasters, providing economic recovery support to individuals, businesses and communities following significant natural disasters, emergencies and acute shocks, and using broader levers available to government to support business growth and productivity (e.g. regulation and tax reform. In the context of limiting interference with freely functioning competitive markets and the obligation of businesses and industry to manage their own risks, five key elements of the role of government in economic recovery are explored below.


References

22 Government of Victoria, 2016. Victorian Guide to Regulation. [Online] Available at: https://www.dtf.vic.gov.au/funds-programs-and-policies/victorian-guide-…External Link [Accessed 05 May 2020].

23 Government of Victoria, 2016. Victorian Guide to Regulation. [Online] Available at: https://www.dtf.vic.gov.au/funds-programs-and-policies/victorian-guide-…External Link [Accessed 05 May 2020].

24 Parliament of Australia, 2004. The Commonwealth Government's Role in Infrastructure Provision - Research Paper no. 8 2003-04 [Online] Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parli…External Link p08 [Accessed 05 May 2020].

25 Department of Regional Australia, Local Government, Arts and Sport, 2015. Regional Australia Standing Council: Framework for Regional Economic Development. [Online] Available at: https://web.archive.org/web/20150311070754/regional.gov.au/regional/pub…External Link Regional_Economic_Development.pdf [Accessed 05 May 2020].

26 Department of Regional Australia, Local Government, Arts and Sport, 2015. Regional Australia Standing Council: Framework for Regional Economic Development. [Online] Available at: https://web.archive.org/web/20150311070754/regional.gov.au/regional/pub…External Link Regional_Economic_Development.pdf [Accessed 05 May 2020].

27 Department of Regional Australia, Local Government, Arts and Sport, 2015. Regional Australia Standing Council: Framework for Regional Economic Development. [Online] Available at: https://web.archive.org/web/20150311070754/regional.gov.au/regional/pub…External Link Regional_Economic_Development.pdf [Accessed 05 May 2020].

28 For a fuller discussion, see, for example, Industry Commission, 1995. Industry Commission Report into Research and Development, Vol 1, pp161-180 [Online] Available at:
https://www.pc.gov.au/inquiries/completed/research-and-development/44ra…External Link [Accessed 05 May 2020].

29 Emergency Management Victoria, 2018. Emergency Management Manual Victoria. [Online] Available at: www.emv.vic.gov.au/policies/emmvExternal Link [Accessed 05 May 2020].

30 Productivity Commission, 2014. Natural Disaster Funding Arrangements, Inquiry Report no. 74, Canberra. [Online] Available at: https://www.pc.gov.au/inquiries/completed/disaster-funding/report/disas…External Link [Accessed 05 May 2020].

31 Productivity Commission, 2017. Transitioning Regional Economies, Productivity Commission Study Report, Canberra. [Online] Available at: https://www.pc.gov.au/inquiries/completed/transitioning-regions/report/…External Link [Accessed 04 November 2020]

Reviewed 01 July 2022

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