ABSTRACT
The chapter discusses the relationship between government and the private sector it draws upon microeconomic theory to help explain the motivation for government intervention. It impacts on the performance of the economy in general and industry sectors and businesses. The theory of the firm suggests that competitive markets encourage economic efficiency by compelling firms to act in response to consumer demands and to produce at least cost. In the Australian case scrutiny of the way government regulates private sector activity has become acutely important. In a market economy, resources are mainly allocated according to the market mechanism. This market mechanism determines what is produced, how much is produced and at what price. If markets were always effective at allocating resources to their most efficient use, then analysing the economic impact of public policy would be a relatively simple undertaking.
