The main economic functions of government

Governments increase efficiency
Governments promote equity
Governments foster macroeconomic stability and growth

No government anywhere in the world, at any time, no matter how conservative it claims to be, keeps its hands off the economy. Governments take on many tasks in response to the flaws in the market mechanism. The military, the police, and the national weather service are typical areas of government activity. Socially useful ventures such as space exploration and scientific research benefit from government funding. Governments may regulate some businesses (such as finance and drugs) while subsidizing others (such as education and biomedical research). Governments tax their citizens and redistribute some of the proceeds to the elderly and needy. How do governments perform their functions? Governments operate by requiring people to pay taxes, obey regulations, and consume certain collective goods and services. Because of its coercive powers, the government can perform functions that would not be possible under voluntary exchange. Government coercion increases the freedoms and consumption of those who benefit while reducing the incomes and opportunities of those who are taxed or regulated. Governments have three main economic functions in a market economy:

— Governments increase efficiency by promoting competition, curbing externalities like pollution, and providing public goods.
— Governments promote equity by using tax and expenditure programs to redistribute income toward particular groups.
— Governments foster macroeconomic stability and growth —reducing unemployment and inflation while encouraging economic growth—through fiscal and monetary policy.