1. Government Regulation of Business
CHAPTER
TWENTY-EIGHT
Government Regulation of Business

2. The Need for Government Regulation
The economic system in the United States is a private enterprise system.
The success of a business in the private enterprise system is dependent upon the quality and price of the goods and services the business offers.
Government regulation is designed to protect the rights of individual businesses.
Regulation protects the rights of individual businesses to compete.
Protecting competition also protects consumers, employees, and stockholders.
Copyright © Houghton Mifflin Company. All rights reserved.

3. The Authority of the Government to Regulate Business
Government has the authority to regulate business if:
– The regulation is needed, and
– The regulation is reasonable.
The federal government regulates business activity in more than one state.
– This type of activity is known as interstate commerce.
State and local governments can regulate only businesses within their borders.
– This type of business is known as intrastate commerce.
Copyright © Houghton Mifflin Company. All rights reserved.

4. Areas of Government Regulation
Much government regulation is designed to maintain competition and protect free trade.
Areas regulated include:
Preventing monopolies
Maintaining fair competition
Taxing business
Regulating crucial industries
Regulating securities
Preserving the general welfare and environment
Copyright © Houghton Mifflin Company. All rights reserved.

5. Preventing Monopolies
Monopoly is a condition where competition is suppressed.
Maintaining Fair Competition
Sherman Act prohibits monopolies or any act that might lead to a monopoly.
The Clayton Act prohibits the merger of corporations if it would tend to create a monopoly.
Robinson-Patman Act prohibits specific types of price discrimination
Federal Trade Commission Act prohibits business defamation and malicious competition
Copyright © Houghton Mifflin Company. All rights reserved.

6. Taxing Business
Taxation of business affects every decision that a business makes.
Every business – sole proprietorship, partnership, and corporation – is subject to an income tax on the owner’s income. This will limit the profits of the business.
Government also requires businesses to collect sales tax from customers. This limits the ability of customers to buy more product.
Payroll tax expenses force businesses to consider this added cost before hiring any employee.
Copyright © Houghton Mifflin Company. All rights reserved.

7. Regulating Crucial Industries
Certain industries require government regulation.
Public utility companies: it is impractical to have two electric, gas, or water companies serving the same service area.
Therefore, one electric, gas, or water company is allowed to operate as a heavily regulated monopoly.
Transportation and communication companies are essential industries and subject to substantial governmental regulation.
– Only a certain number of flights can enter the air traffic system.
– Only a certain number of radio stations can be on the air.
Copyright © Houghton Mifflin Company. All rights reserved.

8. Regulating Securities
There is a strong need to regulate the securities industry because the potential for abuse is very high.
Both federal and state governments have enacted laws to regulate the securities industry.
Many states have adopted the Uniform Securities Act.
– The act requires full disclosure to prospective buyers of all relevant information regarding securities.
Copyright © Houghton Mifflin Company. All rights reserved.

9. Regulating Securities (continued)
Federal laws to regulate securities include:
Securities Act of 1933:
Ensures that investors will have all the information they need to make an informed choice, and
Prohibits fraud and misrepresentation in the sale of securities.
The law covers only the initial issues of securities and not subsequent trading.
Copyright © Houghton Mifflin Company. All rights reserved.

10. Regulating Securities (continued)
Securities Exchange Act of 1934: enacted to protect a buyer after the initial issue of the security
Requires registration of a security prior to the initial issue
Requires annual reports containing relevant company information, including:
Sale of major assets
Management changes
Litigation by and against the company
Created the Securities Exchange Commission to enforce the provisions of both the 1933 and 1934 acts.
Copyright © Houghton Mifflin Company. All rights reserved.

11. Regulating Securities (continued)
The Securities Exchange Commission (SEC) has been heavily involved in recent years in regulating insider trading.
Insider trading is securities trading by those who either, through their employment or connection to people inside the company, have information not available to the general public.
– Insiders then use the inside information to trade securities for their own advantages to the disadvantage of those without the inside information.
– Insider trading can subject a person to both civil and criminal liability for engaging in the prohibited acts.
Copyright © Houghton Mifflin Company. All rights reserved.

12. Preserving the General Welfare and the Environment
Government can require certain people to obtain a license to pursue their business or profession.
Auto repair people, doctors, accountants, attorneys, real estate brokers, etc. are licensed to ensure to the public that a minimum level of competence has been demonstrated.
Government can control where and when products can be sold.
Prescription drugs must be sold at a pharmacy with a prescription from a doctor.
Gasoline can be dispensed only into to approved containers.
Cigarettes and alcohol cannot be sold to minors.
Copyright © Houghton Mifflin Company. All rights reserved.

13. Preserving the General Welfare and the Environment (continued)
Environmental concerns generate several regulations:
Where a business can locate due to:
Noise, traffic, signs, etc.
Whether it is producing or using dangerous substances such as radioactive materials, explosives, etc.
What waste products can be discharged into the air or water
What type of energy can be used
Copyright © Houghton Mifflin Company. All rights reserved.

14. How Government Regulations Are Enforced
Administrative agencies are created by legislatures, and they have the power to:
– Write regulations
– Enforce statutes and regulations
– Conduct judicial hearings regarding statutes and regulations they create
Administrative agencies have a great deal of power within the area they control.
Individuals may pursue enforcement if they suffer damage as the result of a violation of government regulation.
Copyright © Houghton Mifflin Company. All rights reserved.

15. Licensing and Liability of Professionals
To protect the public all states require the licensing of professionals such as doctors, lawyers, accountants, architects etc.
In some states unlicensed persons or businesses may be fined.
Many states will say that an unlicensed individual will be unable to enforce contracts for the service requiring the license.
Copyright © Houghton Mifflin Company. All rights reserved.

16. Licensing and Liability of Professionals (continued)
Professionals can be held liable for malpractice (professional negligence)
Professional conduct is also governed by a variety of laws including:
Traditional common law from judicial decisions
State statutes
Codes of professional conduct
Copyright © Houghton Mifflin Company. All rights reserved.