What Is the Crowding Out Effect Economic Theory?

The crowding out effect is an economic theory that argues that rising public sector spending drives down or even eliminates private sector spending. It is based on the supply of and demand for money, and can have negative effects on economic, social welfare, and infrastructure development. Crowding out, if it exists, slows economic activity and growth, contrary to the prevailing theory that government spending boosts the private sector and the economy.
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