BA 385: Business, Government and Regulation

Chapter Ten: Who’s Flying That Plane?

Introduction to Chapter Ten

The chapter examines the relationship between business and government and in particular the government’s role in influencing business decision making.

Government’s Role in Influencing Business

Prescribes the rules of the game for business.Purchases business’ products and services. Uses its contracting power to get business to do things it wants

. Is a major promoter and subsidizer of business. Is the owner of vast quantities of productive equipment and wealth

. 

Government’s Role in Influencing Business

Is an architect of economic growth. Is a financier. Is the protector of various interests in society against business exploitation. Directly manages large areas of private business. Is the repository of the social conscience and redistributes resources to meet social objectives

.

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?

Roles of Government and Business

Business Beliefs

Maximizes concession to self-interestMinimizes the load of obligations society imposes on the individual (personal freedom)Emphasizes inequalities of individuals

Government BeliefsSubordinated individual goals and self-interest to group goals and group interestsMaximized obligations assumed by the individual and discouraging self-interestEmphasized equality of individuals

Clash of Ethical Systems

Interaction of Business, Government, and the Public

Business

Public

Government

Lobbying

Regulations

andOther Forms

of Persuasio

n

AdvertisingPublic Relations

Political ProcessVoting

Interest GroupsContributions

Interaction of Business, Government, and the Public

Government/business relationshipPublic/government relationshipBusiness/public relationship

Government’s Nonregulatory Influence on Business

Two Major Nonregulatory Issues

Industrial PolicyPrivatization

Industrial Policy Defined…government policy intended to influence the

structure, pricing, and output levels of private markets.

Comes in form of:targeting certain industries for special tax breaks regulatory favors Why? Policy makers believe that these industries

had high growth potential or were 'strategically' important for military or economic reasons.

Japan's Ministry of International Trade and Industry (MITI) is the best-known example of an industrial policy agency.

Industrial Policy: A CritiqueProblems?Industrial policy is a prime target for special interest

capture, as firms attempt to influence government to favor them.

Also, industrial policy has had the effect of raising prices and restricting output due to overbearing and bureaucratic government management.

Free market advocates assert that the market is the best mechanism for allocating scarce resources because everyone's interests are directly represented in buying decisions, whereas government authorities are subject to special pressures and undue influence because government can be the ultimate monopoly.

Government’s Nonregulatory Influence on Business

ProsDecline of U.S. competitivenessUse by other nationsAd hoc system

ConsReduces market efficiencyPromotes political decisionsForeign success variableNational attempts uncoordinated and irrational

Industrial Policy

Government’s Nonregulatory Influence on Business

PrivatizationProducing versus providing a service

(providing: hire a firm to cater public affair; producing: gov’t. agency prepares food and serves it).

Privatization debateFederalization of certain functions

Airport security – Benefits? Disadvantages?

Government’s Nonregulatory Influence on Business

Major employerLarge purchaserMajor influence

SubsidiesTransfer payments

Major competitor

Major lenderTaxationMonetary policyMoral suasion

Other Nonregulatory Influences

Government’s Regulatory Influence on Business

Factors to Consider Regarding Government Regulation

ProtectionScope Cost

Government’s Regulatory Influence on Business

Federal Regulatory AgencyHas decision-making authorityEstablishes standards or guidelines conferring

benefits and imposing restrictions on business conduct

Operates principally in the sphere of domestic business activity

Has its head and/or members appointed by the president (generally subject to Senate confirmation)

Has its legal procedures generally governed by the Administrative Procedures Act

Government’s Regulatory Influence on Business

Controls natural monopolies (economies of scale exist to advantage of one firm, i.e. local telephone service)

Controls negative externalitiesAchieves social goalsOther reasons

Controls excess profits (rise in oil price: unfair luck, affects economic policy)

Controls excessive competition (resulting from excessively low price and leading to monopoly then high priced items)

Reasons for Regulation

Government’s Regulatory Influence on Business

Economic regulationInterstate Commerce

Commission (ICC)Civil Aeronautics Board

(CAB)Federal

Communications Commission (FCC)

Types of RegulationSocial regulation

Environmental Protection Agency (EPA)Occupational Safety and Health Administration (OSHA)Equal Employment Opportunity Commission (EEOC)

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

From regulation to deregulation

Stable

Government’s Regulatory Influence on Business

Fair treatment of employeesSafer working conditionsSafer productsCleaner air and water

Benefits of Regulation

Government’s Regulatory Influence on Business

Costs of RegulationDirect costs (ex. Sheer number of agencies and the costs

involved in supporting those.)

Indirect costs (ex. Forms businesses must fill out to comply.)

Induced costsReduced innovation Reduced investment in plant and equipment Increased pressure on small business

Deregulation

PurposeIntended to increase competition

with the expected benefits of greater efficiency, lower prices, and enhanced innovation.

DilemmaMust enhance competition

without sacrificing applicable social regulations (e.g., health and safety requirements).

Purpose & Dilemma