1. How does the government interact with the other sectors of the economy?

Households sell resources to the government—which uses those resources to produce government services—in return for income. Business firms sell the goods and services they produce to the government for revenue. Taxes are the income the government receives from households and firms. In reality, the government may interact directly with foreign consumers and businesses, but most government activity with the international sector occurs when the government uses business firms as intermediaries.

2. What is the economic role of government?

One outcome of the market system is economic efficiency—that is, no one can be made better off without making someone else worse off. However, economic efficiency can be limited by market imperfections, externalities, public goods, monopolies, and business cycles. The economic role of government is to reduce economic inefficiencies by controlling these factors.

3. Why is the public sector such a large part of a market economy?

There are two explanations for the role of government in the market economy. One view suggests that government intervenes in the economy only to correct market failures. Another argument suggests that government actions result from the rent-seeking behaviors of the individuals who make up the government. That is, voters and politicians use the power of government to transfer benefits to themselves from others.

4. What does the government do?

The economic role of government can be divided into two categories: microeconomic policy and macroeconomic policy. Microeconomic policy deals with providing public goods, correcting externalities, and promoting competition. Macroeconomic policy is divided into two categories: fiscal policy and monetary policy. Monetary policy is directed control of money and credit, and fiscal policy is directed toward government spending and taxation.

5. How do the sizes of public sectors in various countries compare?

The United States and Canada are representative of market systems that rely on the decisions of individuals and in which the public sector is relatively small. Nations like Cuba rely on a planning board or central committee and have large public sectors. The economics of France, the United Kingdom, Germany, Japan and Sweden lie in between.