Role of Government in Economics

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Role of Government The government provides the legal framework and the services needed for a market economy to operate effectively. The legal framework sets the legal status of business enterprises, ensures the rights of private ownership, and allows the making and enforcement of contracts. Government also establishes the legal "rules of the game" that control relationships among business, resource suppliers, and consumers. Discrete units of government referee economic relationships, seek out foul play, and impose penalties. Government intervention is presumed to improve the allocation of resources. By supplying a medium of exchange, ensuring product quality, defining ownership rights, and enforcing contracts, the government increases…show more content…
The main categories of Federal spending are pensions and income security, national defense, health, and interest in the public debt; Federal revenues come primarily from personal income taxes payroll taxes, and corporate income taxes. Each state derive their revenue primarily from sales and excise taxes and personal income taxes; on the other hand, major state expenditures go to education, public welfare, health and hospital, and highways. Local communities derive most of the revenue from property taxes; education is their most important expenditure. Over the years, the tax collections of both state and local government have fallen substantially short of the expenditures. Such shortfalls are largely filled by Federal transfers or grants. It is not common for 20 to 25 percent of all revenue received by state and local government to come from the Federal government. In addition, to Federal grants to state and local government, the states also make grants to local governmental units. According to the U.S. Department of Information Programs, America points to its free enterprise system as a model for other nations. The country 's economic success seems to validate the view that the economy operates best when government leaves businesses and individuals to succeed -- or fail -- on their own merits in open, competitive markets. But exactly how "free" is business in America 's free
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