What Is a Government's Role in the Economy?
The government enhances growth and stability of the economy. It provides the infrastructure and systems that facilitate economic activity while formulating regulations and controls to ensure order and fairness in businesses operations. The government may directly chip in to prop up the economy.
The government supports the economy when it facilitates transport and communication via the postal service and highways and establishes the police and military to safeguard life and property. Local or state governments support the economy by funding education and building roads.
Governments devise rules that ensure businesses operate in the best interests of the public. For instance, the government may allow a monopoly to operate in a market or industry with little competition, such as in utility services, but limit the company’s freedom to increase prices to avoid hurting consumers who would have no recourse.
A government devises monetary policies to keep the economy growing at the desired pace. By controlling circulation of money, adjusting interest rates and tax rates, and controlling access to credit, the government can control the inflation or the decline of the economy. Likewise, the economy is affected when the government gives certain businesses preferential treatment, such as by limiting foreign competition in a specific market or imposing higher taxes on imports to boost domestic production.