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2. Chapter 11 Business, Government, and Regulation
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3. Learning Outcomes
Articulate a brief history of government’s role in its relationship with business.
Appreciate the complex interactions among business, government, and the public.
Identify and describe government’s nonregulatory influences, especially the concepts of industrial policy and privatization.
Explain government regulation and identify the major reasons for regulation, the types of regulation, and issues arising out of deregulation.
Provide a perspective on privatization versus federalization, along with accompanying trends.
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4. Chapter Outline The Pendulum of Government’s Role in Business
The Roles of Government and Business
Interaction of Business, Government, and the Public
Government’s Nonregulatory Influence on Business
Government’s Regulatory Influences on Business
Deregulation
Summary
Key Terms
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5. Business, Government, and Regulation
The government tends to become involved in business after serious problems arise, and there has been no shortage of problems.
The first decade of the 21st century saw the tech stock plunge, and the Enron, WorldCom and other scandals. The collapse of the housing market put the economy on the brink of collapse.
That decade swung the pendulum of government involvement in business from minimal to major player.
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6. The Pendulum of Government’s Role in Business
The areas in which government regulates change, and its varying roles increase the complexity of its relationship with business. Government can:
Determine the rules of the game
Be a major purchaser with buying power that can affect a business’ or industry’s chances of survival
Strengthen some businesses and weaken others
Create new businesses and industries through subsidization and privatization
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7. The Roles of Government and Business
For effective management, government’s role as a stakeholder must be understood.
What should be the respective roles of business and government in our socioeconomic system?
If the role of business were simply production and distribution of goods and services, business would need little regulation.
But other goals exist – safe working environment, equal employment opportunities, fair pay, clean air, safe products – which business does not automatically factor into the business decision making process.
As a result, it falls to government to ensure those goals are achieved.
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8. A Clash of Ethical Systems
Business Beliefs
Government Beliefs
Individualistic ethic
Collectivistic ethic
Maximizes concession to self-interest
Subordinates individual goals and self-interest to group goals and group interests
Minimizing the load of obligations society imposes on the individual (personal freedom)
Maximizing obligations assumed by the individual and discourages self-interest
Emphasizes inequalities of individuals
Emphasizes equality of individuals
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9. Interaction of Business, Government, and the Public (1 of 2)
Government-Business relationship -
Government influences business through regulation, taxation, and more.
Business influences government by lobbying, and more
Public-Government relationship -
Public influences government through voting and forming special interest groups.
Government influences the public with politicking, public policy formation, and other political influences.
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10. Interaction of Business, Government, and the Public (1 of 2)
Business-Public relationship -
Business influences the public through advertising, public relations, and other forms of communication
The public influences business through the marketplace, or by forming special interest groups.
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11. Interaction Among Business, Government, and the Public
Lobbying
Regulations and Other Forms of Persuasion
Advertising
Public Relations
Political Process
Voting
Interest Groups
Contributions
Public
Business
Government
Interest groups
Not buying products
Protests
Politicking
Political influence
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12. Government’s Nonregulatory Influence on Business
Two major nonregulatory issues -
Industrial policy -
Concerned with the role of government in a national economy.
Privatization -
Whether current public functions (e.g., public education, public transit, social security, fire service) should be turned over to the private (business) sector?
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13. Industrial Policy Industrial policy -
Every form of state intervention that affects industry as a distinct part of the economy.
A current trend toward stronger industrial policy is likely to continue while the world economy works to recover from the global financial crisis.
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14. Privatization Privatization -
The process of changing a public organization to private control or ownership.
The intent is to capture the discipline of the free market and a spirit of entrepreneurial risk-taking.
Two functions a government might perform:
Producing a service
Providing a service
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15. 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.
Privatization produces uneven results in efficiency gains and cost savings.
Privatization works best when the pursuit of profits does not work against broader social goals or public policy.
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16. Other Nonregulatory Government Influences
Government is:
A major employer
A standard setter
One of the largest purchasers
Government influences business by:
The use of Subsidies
Transfer payments
Loans and loan guarantees
Taxation
Monetary policy
Moral suasion
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17. Government’s Regulatory Influence on Business
Government Regulation has become the most controversial in the business-government relationship, affecting every aspect of how business functions.
Most people agree that some regulation is necessary to ensure that consumers and employees are treated fairly, and not exposed to hazards, and to protect the environment.
However, businesses also think that regulation has often been too extensive in scope, too costly, and burdensome in terms of red tape.
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18. Regulation - What Does It Mean?
The act of governing, directing according to rule, or bringing under the control of law or constituted authority.
A federal regulatory agency -
Has decision-making authority
Establishes standards
Operates principally on domestic business
Has members appointed by the President subject to Senate confirmation
Has its legal procedures governed by the Administrative Procedures Act
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19. Reasons for Regulation
Most regulation arises out of a market failure.
Controlling negative externalities
Achieving social goals
Controlling excess profits
Controlling natural monopolies
Controlling excessive competition
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20. Types of Regulation (1 of 2)
Civil Aeronautics Board
Federal Communications Commission
Interstate Commerce Commission
Economic Regulation
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21. Types of Regulation (2 of 2)
Occupational Safety and Health Administration
Environmental Protection Agency
Equal Employment Opportunity Commission
Social Regulation
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22. Comparison of Economic and Social Regulation
Economic Regulations
Social Regulations
Focus
Market conditions;
economic variables
People in roles as employees, consumers and citizens
Affected Industries
Selected (railroads, aeronautics, communications)
Virtually all industries
Examples
CAB FCC
EEOC, OSHA, CPSC, EPA
Current Trend
Had been moving from regulation to deregulation, but fallout from the economic crisis reversed the trend
Efforts underway to create an independent consumer financial protection agency
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23. Issues Related to Regulation -
Innovation may be affected –
When corporate budgets must focus on “defensive research” certain types of innovation are less likely to take place.
New investments in plant and equipment may be affected –
To the extent that corporate funds must be used for regulatory compliance, they are diverted from more productive uses.
Small business may be adversely affected –
Federal regulations can have a disproportionately adverse effect on small firms because of the (lack of) economies of scale.
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24. Deregulation -
Represents a counterforce - aimed at keeping the economy in balance. A continual striving for the balance of freedom and control for business will be best for society.
Purpose of Deregulation -
Intended to increase competition with hopes for greater efficiency, lower prices, and enhanced innovation.
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25. The Changing World of Deregulation
Deregulation which began in the 1980s had mixed results.
Some prices fell, but more competitors were unable to compete with the dominant firms.
The savings & loan industry crisis cost the government a $124 billion bailout.
Repeal of the Glass-Steagall Act caused the global recession that began in 2008.
The dilemma is how to enhance competition without sacrificing applicable social regulations such as health and safety requirements.
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26. Key Terms collectivistic ethic of government deregulation direct costs
economic regulation
excessive competition
excess profits
federalization
indirect costs
individualistic ethic of business
induced costs
industrial policy
market failure
natural monopoly
negative externalities
privatization
regulation
reregulation
social costs
social goals
social regulation
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