The process you are referring to is called sealcoating or chip sealing. Most road agencies in Michigan use this process as a relatively low cost method of preserving existing pavement.
The tar is an emulsion of water and liquid asphalt that penetrates and seals the smaller cracks in the existing pavement. Sealing these cracks on a regular basis prevents water from seeping into and softening the base of the road over time, which would cause potholes to form. The crushed stone that is used for cover material sticks to the emulsion and, after rolling and sweeping, provides a slightly roughened skid resistant surface which improves safety.
Although sealcoating can preserve and extend the life of the pavement, it is only a surface treatment and does not fill any existing bumps, holes, or other irregularities and thus does not improve the ride quality. For this reason it is important to apply sealcoat to a road before deterioration occurs, which means we sealcoat roads that are in good condition rather than waiting for them to deteriorate to the point that extensive patching or reconstruction is necessary.