Chapter Key Points Government regulation used to compensate for failures Political reasons for regulation Primary constitutional foundation impacting regulation: Supremacy Clause, Commerce Clause, police power and Takings Clause Analysis differs based on whether commerce is foreign, interstate or intrastate in nature 7 Government Regulation Of Business: An Introduction

Fundamental Questions Throughout Course What is the proper role of business in society? Has business abused the public trust? Is government the answer to the problem? Might we rely on self regulation (ethics and social responsibility) and market “regulation”? What is the proper blend of these “control” devices as well as others left unexplored (e.g., social customs)? McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Market Failure—Part I Imperfect Information: An efficient free market presumes reasoned decisions. Reasoned decisions require adequate information. Because we cannot have perfect information and often will not have adequate information, the government may impose regulations either to improve the available information or to diminish the unfavorable effect of inadequate information. Monopoly: Natural monopolies exist where a single large firm is more efficient then several smaller ones. In such situations, the government has commonly intervened to preserve the efficiencies of the large firm while preventing that firm from taking unfair advantage of the consumer. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Market Failure—Part II Externalities: When all the costs of a good or service are not fully internalized or absorbed, those costs or benefits fall elsewhere as what economists have labeled externalities, neighborhood effects, or spillovers. Government regulation is sometimes considered necessary to place full cost on those who generated it, which in turn is expected to result in less wasteful use of resources. Public Goods: Some goods and services cannot be provided through the pricing system because we have no method for excluding those who choose not to pay. For such public goods, the added cost of benefiting one person is zero or nearly so. Thus, in the absence of government regulations, public goods would not be produced in adequate quantities. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Regulatory Life Cycle? Stage One: The free market itself—the period when government regulation is absent from the market in question. Stage Two: A market failure is identified suggesting the need for government intervention. Stage Three: Government regulation is imposed in the form of a rule. Stage Four: Regulatory failure occurs because, in brief, the benefits of the rule in question no longer exceed its costs. Stage Five: The government may respond with regulatory reform to correct the failure. Stage Six: The regulation in question is simply eliminated. The market, thus fully deregulated, has returned to Stage One and the regulatory life cycle is complete. Source: Joseph P. Toumain, “American Regulatory Policy: Have We Found The ‘Third Way’?” Kansas Law Review 48 (May 2000), p McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Philosophy and Politics An explanation for government regulation may also lie in the political process:  One view is that regulation is considered necessary for the protection and general welfare of the public: To achieve a more equitable distribution of income and wealth; or to stabilize the economy, thus curbing the problems of recession, inflation and unemployment.  Another view is that regulation is developed at the request of industry and is operated primarily for the benefit of the industry, illustrated by the various subsidies and tax advantages afforded to business.  Bureaucrats who perform government regulation are themselves a powerful force in maintaining and expanding that regulation. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

The Constitutional Foundation of Business Regulation  Commerce Clause, Article I, Section 8: “The Congress shall have the power … To regulate Commerce with foreign Nations, and among the several states …”  Supremacy Clause, Article VI, Section 2: “This Constitution and the Laws of the United States … shall be the Supreme Law of the land.”  Police Power: State authority to regulate commerce resides in the police power specified by the Constitution. Police power refers to the right of state governments to promote public health, safety, morals and general welfare by regulating persons and property within each state’s jurisdiction.  Takings Clause, Fifth Amendment: “[N]or shall private property be taken for public use, without just compensation.” McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Interstate Commerce Heart of Atlanta Motel v. U.S. (S. Ct. 1964) (public accommodation provisions under the Civil Rights Act of 1964 found constitutional) U.S. v. Lopez (S. Ct. 1995) (Gun-Free School Zones Act held unconstitutional) Brzonkala v. Morrison (S. Ct. 2001) (Violence Against Women Act held unconstitutional) McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

State and Local Regulation of Commerce Intrastate Commerce: Purely intrastate commerce, having no significant effect on interstate commerce, is within exclusive regulatory jurisdiction of the states. Of course, commerce purely intrastate in nature is uncommon. Interstate Commerce: Regulation by the federal government or state governments or both may be permissible. Foreign Commerce: The federal government has exclusive regulatory authority over foreign commerce. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

State and Local Regulation of Interstate Commerce Such regulation is unconstitutional if:  It expressly discriminates against interstate commerce.  It unduly burdens interstate commerce.  It imposes only an “incidental” burden on interstate commerce, but that burden is clearly excessive in relation to local benefits.  Legitimate local purposes could be adequately served by reasonable non-discriminatory alternatives. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Globalism versus Nationalism An international example of similar to our balance between federal and state governments is the balance between collective and national bodies of the European Union, which hopes to have a constitution by McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

State and Local Regulation of Business  Categories:  Controlling entry into business  Regulating competition  Preventing consumer fraud McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

State and Local Regulation of Community Welfare Voyeur Dorm v. City of Tampa (11 th Cir. 2001) McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Takings Clause Total Takings: If government acts in a way that takes all the economic value of a property or permanently physically invades it, the taking requires just compensation unless government is preventing a nuisance or the regulation was permissible under the law at the time the owner purchased the property. Exaction/Mitigation: Where the government allows land development only if the owner dedicates some property interest (called an exaction) or money to the government (called a mitigation or impact fee), it is constitutional only if the two factors met. The first is a nexus or a relationship between government’s legitimate purpose and the condition imposed. Second, government must show a “rough proportionality” between the burden imposed and the impact of the development. Partial Takings: Constitutionality determined on a case-by-case analysis that depends greatly upon the facts in each instance. The primary considerations are the importance of the government interest, the economic effect on the landowner, and the landowner’s legitimate, investment-backed expectations at the time of purchase. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Too Much Regulation? Consider the desirability of regulating:  The use of cell phones while driving  Use of tanning salons  Health standards of tattoo parlors McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.