© 2015 Cengage Learning
1
Chapter 11
Business,
Government,
and Regulation
© 2015 Cengage Learning
2
Learning Outcomes
1. Articulate a brief history of government’s role in its
relationship with business.
2. Appreciate the complex interactions among business,
government, and the public.
3. Identify and describe government’s nonregulatory
influences, especially the concepts of industrial policy and
privatization.
4. Explain government regulation and identify the major
reasons for regulation, the types of regulation, and issues
arising out of deregulation.
5. Provide a perspective on privatization versus federalization,
along with accompanying trends.
© 2015 Cengage Learning
3
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
© 2015 Cengage Learning
4
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.
© 2015 Cengagje Learning
5
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
© 2015 Cengage Learning
6
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.
© 2015 Cengage Learning
7
A Clash of Ethical Systems
Business Beliefs
Government Beliefs
Individualistic ethic
Collectivistic ethic
Maximizes concession to Subordinates individual
self-interest
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
© 2015 Cengage Learning
8
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.
© 2015 Cengage Learning
9
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.
© 2015 Cengage Learning
10
Interaction Among Business,
Government, and the Public
Lobbying
Business
• Interest
groups
• Not buying
products
• Protests
Regulations and Other
Forms of Persuasion
Government
• Political Process
• Voting
• Interest Groups
• Contributions
• Advertising
• Public Relations
• Politicking
• Political
influence
Public
© 2015 Cengage Learning
11
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?
© 2015 Cengage Learning
12
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.
© 2015 Cengage Learning
13
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
© 2015 Cengage Learning
14
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.
© 2015 Cengage Learning
15
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
© 2015 Cengage Learning
16
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.
© 2015 Cengage Learning
17
Regulation - What Does It Mean?
Regulation •
•
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
© 2015 Cengage Learning
18
Reasons for Regulation
Most regulation arises out of a market failure.
Controlling natural monopolies
Controlling negative externalities
Achieving social goals
Controlling excess profits
Controlling excessive competition
© 2015 Cengage Learning
19
Types of Regulation (1 of 2)
Interstate Commerce Commission
Economic
Regulation
Civil Aeronautics Board
Federal Communications Commission
© 2015 Cengage Learning
20
Types of Regulation (2 of 2)
Equal Employment
Opportunity Commission
Social
Regulation
Occupational Safety and
Health Administration
Environmental Protection Agency
© 2015 Cengage Learning
21
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
© 2015 Cengage Learning
22
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.
© 2015 Cengage Learning
23
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.
© 2015 Cengage Learning
24
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.
© 2015 Cengage Learning
25
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
© 2015 Cengage Learning
26