Chapter 11Chapter 11Business, Business,

Government, Government, and Regulationand Regulation

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The Pendulum Swing of Government and Business

• The level of government involvement in business varies over time.

• Business never likes activist government involvement.

• Public opinion varies, depending on the economy, whether there have been ethical scandals, and other factors.

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Government’s Role in Influencing Business

A regulator of business that can determine the rules of the game.

A major purchaser with buying power that can affect a business’ or industry’s survival.

Can elevate some industries while devaluing others through government policy.

Can create new businesses and industries through subsidies and privatization.

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Roles of Government and Business

• What should be the respective roles of business and government in our socioeconomic system?

• Given all of the tasks that must be accomplished to make our society work, which of these tasks should be handled by the government and which should be handled by business?

How much autonomy are we willing to allow business?

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Clash of Ethical Systems

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Privatization

Privatization

•The process of turning over to the private sector some function that was previously handled by a government body.

An integral part of the 21st century strategies of most nations.

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The Privatization Debate

Pro-Privatization•Government has no comparative advantage in many functions.•Government is less efficient and less flexible.

Anti-Privatization•Some activities cannot be effectively handled by the private sector (such as airlines or the postal system).

Privatization produces uneven results in efficiency gains and cost savings.

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Government’s Regulatory Influence on Business

Factors to consider regarding government regulation

Fair treatmentProtectionScope CostBurden

Analysts believe that business interference in government policy making is at an all-time high.

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What Does Regulation Mean?

Regulation

•The act of governing, directing according to rule, or bringing under the control of law or constituted authority.

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Reasons for Regulation

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Most regulation arises out of a market failure.

Types of Regulation

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Types of Regulation (continued)

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Reasons for Regulation

Most regulation currently represents responses to two major events

1. The World Trade Center and other terrorist attacks

2. The recent financial scandals beginning with Enron

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Benefits of Regulation

Fair treatment of employees

Safer working conditions

Safer products

Cleaner air and water

It is difficult to measure the magnitude of benefits.

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Costs of Regulation

Direct costs•Number of new agencies created, expenditures, and growth patterns of the budgets of federal regulatory agencies.

Indirect costs•Forms, reports, and questionnaires that businesses must complete.

Induced costs•Innovation •New investments in plant and equipment•Small business

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Deregulation

Purpose• A counterforce aimed at keeping the

economy in balance.• Intended to increase competition with hopes

for greater efficiency, lower prices, and enhanced innovation.

Problems•Many competitors are unable to compete with the dominant firms– concentration of power within a few dominant firms.•Must enhance competition without sacrificing applicable social regulations (e.g., health and safety requirements).

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