The use of public finance to stabilize the economy

The profit motive that guides the private markets makes the players in these markets pursue goals that could be beneficial to a few people in the economy but detrimental to the rest of the society. The government can use public finance to bring stability to the local markets when that stability is threatened by the activities of private markets or other forces. One area in which the government can play an active role in stabilizing is the employment market.

As the collector and spender of vast amounts of money, the government can influence the levels of business activities and employment in a number of ways. The government, by getting directly involved in the market, can influence the level of demand for goods and services. Through public finance, the government can create demand for certain goods and services and consequently create employment in the industries affected. Moreover, the government can use tax measures to discourage production in areas it finds harmful to the economy.

In a nutshell, the government has several mechanisms at its disposal to provide stability in areas of the economy that would need regulating (Auld, 1975). A recent example of intervention by the US government to correct the market was the action taken to control fishing activities in Alaska in 1983 (“Fundamental principles of public finance”). Faced with the prospect of fishermen depleting the halibut fish, the government introduced instructions on handling of the fish and issued fish quotas.

This ensured that less fish would be harvested and in this way the government saved the fish from extinction. The current sub-prime crisis can be blamed on government failure to act fast to control the actions of sub-prime mortgage companies in the past. As Gordon (2008) notes, had the government exercised it stabilizing role more effectively, it would have reined in corporations of dubious credibility and saved the world much agony.