Crowding out effect is an economic term referring to government spending driving down private sector spending, and can have several more specific meanings.Crowding out can refer to when government borrowing absorbs all the available lending capacity in the economy.  This causes interest rates to rise.  As a result, private businesses and individuals find it cost prohibitive to borrow money to fund growth and expansion.  This, in turn, can create a downturn in the economy, which lowers tax revenue and thus increases the need for the government to borrow even more money.  In another example, higher taxes required for the government to fund social welfare programs can leave less discretionary income for individuals and businesses to make charitable donations.  Further, when the government funds certain activities, there is little incentive for businesses and individuals to spend on those same things. From this perspective, private business does not enter into a market segment because the government provides a service that makes that segment unprofitable or undesirable.  For instance, more and more roads are being funded and built by private companies, which construct them as toll roads to make a profit. But if the government increases its spending on public roads, growth in the private toll road business will decline.  Finally, crowding out can also refer to the government conducting activities that were traditionally performed by the private sector.  For instance, an increase in government investment and grants to private businesses crowds out the financial entities, such as venture capital firms, that traditionally do this themselves.