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Government's Role in Economics - Essay Example

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Government's Role in Economics

The marketplace and the government meet head-on in the division of authority in the creation and distribution of goods, services, and wealth. All economists, except the most conservative capitalists, believe that the government has some role in constructing and guiding the economy. The role of the government in economics is to assure that the economy of the country is able to express its culture and societal will.
Taxation is one of the primary policy functions that a government can use to stimulate or discourage economic activity. Indeed, governments require taxation to provide the necessary funding for needed projects. Ideally, it is hoped that taxation would be fair and all citizens would bear an equal tax burden based on their abilities and needs. However, capitalism has been able to develop concentrated wealth and this unbridled economic freedom has the possibility to create the perception of a shortage of resources. The sixteenth and seventeenth centuries were characterized by food riots as production increased the supply, markets agitated a sense of shortage, and the threat of unfair taxes interjected a sense fear into the system. The government's role in economics is to assure the fair implementation of tax laws and eradicate the fear of taxes. According to Rothschild, "Commerce will flourish only in a state with a regular administration of justice" (14). The government's role in taxation is to sustain a high degree of confidence in the application of the existing tax laws.
The government's role in economics, in regards to taxes, is the generation of confidence in justice and not directing society through tax encouragements. Governments often assume the role of directing a society's culture through a series of punitive taxes or rewarding credits. Taxes are often levied against a product, such as tobacco, whose use is viewed as deviant or costly to society. In contrast, tax credits are given to stimulate an industry, such as oil exploration, that is seen as a benefit to society. These functions are beyond the role that the government should play and become invasive into the marketplace. While special interest groups call for windfall taxes on excess oil company profits, others call for tax credits for using solar energy. When the government assumes this role, they have taken away the free market expression of the people's will in regards to what energy they will consume. The government's role in the economy should be to make the marketplace available to everyone, without the artificial rewards and punishments offered by individually crafted tax laws. Society's will should be reflected through the free market and not government intervention.
While taxation to stimulate or deter a product or industry usurps the market's role in economics, the government does have a role in taxation to assure a fair and prosperous fiscal policy. Colander defines fiscal policy as "the deliberate change in either government spending or taxes to stimulate or slow down the economy" (583). Defining and directing fiscal policy is the primary role of government in the economy. The Federal Reserve Board has the task of calibrating and steering the economy through the regulation of the money supply and interest rates. This helps to assure adequate capital markets and an environment that is ...Show more


Governments, societies, civilizations, and cultures are largely defined by the distribution of wealth and resources. While the history of man illustrates the need to cooperate in the marketplace and how mankind has depended on the exchange of goods for survival, modern economics has evolved into a paradox of a well planned system of free market enterprise…
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Governments Role in Economics essay example
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