© 2015 Cengage Learning

Chapter 11 Business, Government, and Regulation © 2015 Cengage Learning

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. © 2015 Cengage Learning

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

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

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

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

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 © 2015 Cengage Learning

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

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

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 © 2015 Cengage Learning

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

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

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

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

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

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

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 © 2015 Cengage Learning

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 © 2015 Cengage Learning

Types of Regulation (1 of 2) Civil Aeronautics Board Federal Communications Commission Interstate Commerce Commission Economic Regulation © 2015 Cengage Learning

Types of Regulation (2 of 2) Occupational Safety and Health Administration Environmental Protection Agency Equal Employment Opportunity Commission Social Regulation © 2015 Cengage Learning

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

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

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

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

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