Business, Government,

and Regulation
 Regulation of Business
This chapter:
 Details the reasons for government regulation of business
 Discusses the historical and current patterns of regulation
 Describes how regulations are made
 Discusses the overall costs and benefits of regulations

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 Government’s Role in
Influencing Business
1. Prescribes the rules of the game for
business.
2. Purchases business’ products and
services.
3. Uses it contracting power to get
business to do things it wants.
4. Is a major promoter and subsidizer of
business.
5. Is the owner of vast quantities of
productive equipment and wealth.
 Government’s Role in
Influencing Business
6. Is an architect of economic growth.
7. Is a financier.
8. Is the protector of various interests in
society against business exploitation.
9. Directly manages large areas of private
business.
10. 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?
 Government’s Regulatory
Influence on Business
Reasons for Regulation
 Controls natural monopolies
 Controls negative externalities
 Achieves social goals
 Other reasons
 Controls excess profits
 Controls excessive competition
 Interaction of Business,
Government, and the
Public
Lobbying

Regulations
Business and Government
Other Forms
of Political Process
Persuasion Voting
Advertising Interest Groups
Public Relations Contributions

Public
 Government’s Regulatory
Influence on Business

Factors to Consider Regarding

Government Regulation
 Protection
 Scope
 Cost
 Underlying Reasons for Government
Regulation in the Private Sector
 Government regulation of the private
sector is justified under two
circumstances:
 When flaws appear in the marketplace that
product undesirable consequences.
 When adequate social, political, and other
reasons for government regulations exist.

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 1. Flaws in the Market
Reasons for Regulation
 Natural monopoly
 Destructive competition
 Externalities
 Inadequate information

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 2, Social and Political
Reasons for Regulation
 Socially desirable goods and services
 Socially desirable production methods
 Resolution of national and global
problems
 Regulation to benefit special interests

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

 How Government Regulations
are Made
 All federal regulation originates in an act of
Congress.
 A bill is a proposed piece of legislation placed
before the Congress for its approval.
 When a bill is passed by both houses of Congress
and signed by the president its provisions become
law.
 It is then the responsibility of the appropriate
regulatory agency to create the specific regulations
(rules) needed to implement the provisions of the
bill (rule making).

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

 Regulatory Agencies and All
Three Branches of Government
Influence Regulations
 Regulatory agencies create the regulatory rules. A rule is a
decree developed by an agency to implement a law passed
by Congress.
 Presidents have used many devices to limit and direct
regulation including executive orders, favorable appointments
of agency administrators, and central review of regulations in
the White House.
 Congress approves presidential nominees as head regulators
and approves agency budgets.
 Federal courts have the power to hold unlawful agency
actions that are arbitrary, capricious, unconstitutional, in
excess of agency jurisdiction, or unsupported by evidence.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

 Regulation in Other Nations

 The World Bank conducted a study to

catalog, classify, compare, and evaluate
regulations in every nation. Four basic
findings were:
 Regulation varies widely around the world.
 Poor countries regulate business the most.
 Rich countries regulate business in a consistent
manner while poor countries do not.
 Developed countries engage in continuous
regulatory reform while there is thus reform in
developing countries.

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 Benefits of
Government Regulation
 Regulation has helped to:
 Improve the position of minorities
 Clean the environment
 Prevent monopoly
 Reinforce free competition
 Prevent corruption
 Strengthen the banking system
 Reduce industrial accidents
 Provide resources for the elderly
 Control communicable diseases
 These benefits are enormous and
incalculable
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 Principles of Good
Regulation
1. Simplify and deregulate in
competitive markets.
2. Focus on enhancing property rights.
3. Expand the use of technology.
4. Reduce court involvement in
business matters.
5. Make reform a continuous process.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

 Concluding Observations
 There have been ups and downs in the trend of
regulations, but the basic direction has been up,
with respect to both total volume and complexity.
 Successive efforts of presidents have not
succeeded in slowing the expansion of regulation,
but have produced needed reforms.
 The cost of federal regulations is huge, but the cost
is offset in significant degree by the many benefits
of regulation to society as a whole, individuals,
companies, and industries.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

 Roles of Government and
Business
Clash of Ethical Systems
Business Beliefs Government Beliefs
 Maximizes concession to  Subordinated individual
self-interest goals and self-interest to
 Minimizes the load of group goals and group
obligations society interests
imposes on the individual  Maximized obligations
(personal freedom) assumed by the individual
 Emphasizes inequalities and discouraging self-
of individuals interest
 Emphasized equality of
individuals