Chapter 11 Business, Government, and Regulation © 2012 South-Western, a part of Cengage Learning 1

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. 2 © 2012 South-Western, a part of Cengage Learning

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. © 2012 South-Western, a part of Cengage Learning 3

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? 4 © 2012 South-Western, a part of Cengage Learning

Clash of Ethical Systems 5 © 2012 South-Western, a part of Cengage Learning

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 21 st century strategies of most nations. 6 © 2012 South-Western, a part of Cengage Learning

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. 7 © 2012 South-Western, a part of Cengage Learning

Government’s Regulatory Influence on Business Factors to consider regarding government regulation Fair treatment Protection Scope Cost Burden  Analysts believe that business interference in government policy making is at an all- time high. 8 © 2012 South-Western, a part of Cengage Learning

What Does Regulation Mean? Regulation The act of governing, directing according to rule, or bringing under the control of law or constituted authority. 9 © 2012 South-Western, a part of Cengage Learning

Reasons for Regulation 10 © 2012 South-Western, a part of Cengage Learning Most regulation arises out of a market failure.

Types of Regulation 11 © 2012 South-Western, a part of Cengage Learning

Types of Regulation (continued) 12 © 2012 South-Western, a part of Cengage Learning

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 13 © 2012 South-Western, a part of Cengage Learning

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. 14 © 2012 South-Western, a part of Cengage Learning

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 15 © 2012 South-Western, a part of Cengage Learning

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). 16 © 2012 South-Western, a part of Cengage Learning