In a mixed economy, the governments besides public sector play an important role in the economic life of the state through the revenue and expenditure measures of its budget. The important functions are:
(i) Allocation function
(ii) Distribution function
(iii) Stabilization function
(i) Allocation Function:
Government has to provide for public goods. Public goods such as national defense, government administration and so on are different from private goods. These goods can not be provided through market mechanism but are essential for consumers and therefore, government has to provide them. Because of that government has to allocate resources between private goods and public goods.
Private goods are limited to some individual or individuals but public goods are available to all. Secondly, private goods are available to those only who can buy them but this is not the case with regard to public goods. These are available to those also who can't afford them financially,
(ii) Distribution Function:
Through its tax and expenditure policy government affects distribution of personal income of households in a manner which is just and fair. As such it taxes the rich and spends for the schemes which benefit more the poor.
(iii) Stabilization Function:
Economy of a country is affected by economic fluctuations such as conditions of boom and depression. Such changes benefit some and harm others. In such a situation appropriate policy measures are required by the government to affect the levels of aggregate demand. Such measures are called stabilization measures. These measures aim at avoiding the situations of inflation and unemployment.