Even with the existence of non-voluntary government has impact on microeconomics, governments are financed via taxes. And these are frequently taken from the private sectors. When such thing happens, individuals as well as businesses should either work and produce additional amount or spend less to be able to offset the new amount of tax imposed.

The Power that Government has

Governments even have the power of altering markets when they have decided to spend money. Any businesses or individuals that received government funding, is a wealth transfer from other taxpayers. In case that a business has received a subsidy from the government on the other hand, then it is producing higher cost curvature.

All of the actors that may have received the funds have often less revenue or income.

Fiscal Policy and its Direct Impact in the Economy

As for the fiscal policy, it is impacting the prices directly. If for example that the government has spent over a million dollars buying computers, then it is bidding up the cost of computers in short run. This is crowding out other players who are priced out.

Basically, the same effect takes place whenever the government has issued bonds and it has crowded out other lenders in the market. This “crowding out” actually becomes more disruptive in the event that the government has provided the services directly and employed workers.