Question

Which of the following is primarily a function of the federal government? 

 a. Increasing the money supply in the economy

 b. Ensuring that firms maximize profits

 c. Promoting the growth of natural monopolies

 d. Providing home mortgage loans

 e. Dealing with externalities

Answer 1

The primary function of federal government is (e)dealing with externalities. Federal government has been assigned with some powers and functions.It need to perform those functions efficiently.It usually controls the externalities present in the economy so that cost of goods and services do not increase.

a.)Increasing money supply in the economy is not the function of federal government.Federal reserve bank deals with increasing money supply in the economy.Fed bank supervises the supply of money prevailing in the society.As this function is already assigned to federal reserve bank,it is not the function of federal government.Since supervising money supply is crucial and vital activity and it requires complete efforts and attention,federal government is not assigned with this function as it already has many other major roles to perform.Therefore,increasing money in the economy is not the correct option for the primary function of federal government.

b.)Ensuring that firms maximise profits is not the primary function of federal government.It is one of the function but not the main or primary function of federal government.Generally,federal government work on profit maximisation only when necessary,in case if the firms are facing huge losses.It concentrates on boosting profits of firms,when there is no incoming revenue.So,it is not the primary function of federal government to maximise profits.Therefore,it is not correct option.

c.)Even promoting growth of natural monopolies is not the function of federal government.Usually monopolies reduce the growth of economy as they tend to have upper hand in the market.After particular time,monopolies increase the prices the goods and it may cause imbalance to economy.So,federal government do not focus on promoting growth of monopolies instead it focuses on improving performance of all the companies,firms,etc.Therefore,promoting growth of natural monopolies is not the primary function and it is not suitable option.

d.)Providing home mortgage loans is not the primary function of federal government as there are many other public finance institutions like government banks,etc which provide home mortgage loans to people.Federal government is not started to provide to loans,debts to people.To provide this service to public,federal reserve bank and other banks are appointed.Hence,it is not the right option and federal government's primary function is not to provide home mortgage loans.

e.)Dealing with externalities is the right option and primary function of federal government.It is basic and main objective of federal government to control externalities. The profit incurred by assigning higher prices on companies or consumers is called as externality. These externalities might cause great damage to economy.If a company destroys environment as the process of production ,then either company or the consumers has to pay for it.In case,if company is ready to pay then making cost rises.If making cost rises,then company increase the cost of goods.By this even remaining companies rise their cost of goods and products and consumers might not be able to afford to such goods.If cost of goods and products rise,there will be low consumption and inflation may occur.This damages the economy very badly.So federal government itself bans such companies and promotes only certain externalities which helps citizens to avail basic needs or to avail training which improves their skills so that they will be able to contribute towards country's total production.Hence,dealing with externalities is the primary function of federal government and is correct option.

Therefore,dealing with externalities is the primary and basic function of federal government.It is main responsibilty of federal government to look after externalities.