In a modern industrial economy, no sphere of economics life is untouched by the government. We can  three major instruments or tools that government uses to influence private economic activity:

1. Taxes on incomes and goods and services.’ These reduce private income, thereby reducing private expenditures (on automobiles or restaurant food) and providing resources for public expenditures (on missiles and school lunches). The tax system also serves to discourage certain activities by taxing them more heavily (such as smoking cigarettes) while encouraging other activities by taxing them lightly or’ even subsidizing them (such as owner-occupied housing).

2. Expenditures on certain goods or services (such as roads, education, or police protection), along with transfer payments (like social security and health-care subsidies) that provide resources to individuals. ‘

3. Regulations or controls that direct people to perform or refrain from certain. economic activities. Examples include rules that limit the amount firms can pollute, or that divide up the radio spectrum, or that mandate testing the safety of new drugs,

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