The role of government

Government plays a large role in all modern economies. The government sector, which includes federal, state, and local governments, relates to households and firms. The government pays its employees, including elected officials from the president on down, wages and salaries. These wages and salaries join the flow of payments from firms for productive services, and these flows taken together make up total household income. Governments also make transfer payments to individuals without requiring the provision of any service in return. Social security, welfare benefits, and grants to college students are examples of transfer payments. Transfers are not payments for services, as with wages, but are more in the nature of gifts or grants paid to individuals who meet certain qualifications. The work transfer is very descriptive, because these payments transfer money from some households, as taxpayers to other households, who qualify as recipients of the benefits.

The government also affects how goods are produced, for example through the regulations it imposes. Managers of factories and mines must obey safety requirements even where these are costly to implement, firms are prevented from freely polluting the atmosphere and rivers, offices and factories are banned in attractive residential parts of the city.