The sentence says that Our democratic government is created by, and exists for the people.
It means that people create a government by some method. What they create is for them.
I guess what you should pick is the last one (4). But the central idea of (4) is that everyone creates (collectively) what a government is like. That's only 1/2 what the given sentence says. The rest of the given sentence says it is to their benefit. Still you have no other choice.
