What Are the Economic Functions of Government?

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  • 0:40 Regulation
  • 1:15 Competition
  • 1:40 Correcting Externalities
  • 2:25 Public Goods And Services
  • 3:00 Income Redistribution
  • 3:50 Economic Stability
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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Find out what the six economic functions of government are in the United States. See some examples in each of the categories and find out how you benefit from them.

Economic Functions of Government

Can you imagine if there were no laws to enforce business contracts, no prisons, no welfare programs to help low-income people with healthcare or food, and no stability in the prices you pay for everyday goods and services? The economy would look and feel very different, that's for sure!

In order to maintain an economy and society that functions more smoothly, government has stepped in to help out where needed. There are many things the government does to ensure the economy runs smoothly. For the purpose of this lesson, we will focus on six economic functions of government. Let's explore them now and provide a few examples of each.


First, the government regulates legal and social framework. Can you imagine if one business partner stole from another partner and there was nothing that could legally be done about it? Luckily, the government helps ensure that legal contracts for businesses are enforceable through a court system. This helps keep all people accountable when doing business together. This function also ensures that when you purchase a home or other asset that you have certain rights and protections. Would you purchase a home if you knew you had no legal right to the property? Luckily, that is not the case!


Second, the government helps maintain competition. Can you imagine if you only had one airline to choose from when you flew? How about only one cell phone carrier or one company to purchase cars from? Part of the government's role is to enforce anti-trust laws, which keep monopolies from happening. This ensures many businesses are able to compete and offer products and services to consumers. As a result, you experience better quality products and lower prices.

Correcting Externalities

Third, the government is there for correcting externalities. Externalities are effects of business decisions that can affect people or parties that had no say in a matter or no control over decisions in the first place. An example is factory pollution. A factory may produce a great product that is needed in the economy, such as pet food, vehicles, or aspirin. In making that product, the factory may create a lot of pollution or waste that can cause health concerns for nearby areas. In this case, the government can step in and can tax or set regulations to help ensure pollution and waste are kept at acceptable levels.

Public Goods and Services

Fourth, the government provides public goods and services. One of the government's duties is to ensure we all feel safe through an adequate national defense program. They also provide national parks, like Yellowstone and Yosemite, that we can enjoy. Things that many of us rely on, such as prisons, fire services, public schools, transportation, and delivering mail, are all examples of this. These are all things that the public and, by extension, the government have deemed too important to be left to the devices of private businesses and organizations or to the whims of making a profit.

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