July 30, 2007
What are the key reasons for Government regulation of the private sector?
In an economy there are two sectors, the public and private. The private sector, by definition, is the part of a nation's economy that isn't controlled by the government.(Investorwords). Several business organizations make up the private sector with the three basic ones being sole proprietorships, partnerships, and corporations. Most are for profit and part of that profit goes to the government in the form of taxes. The private sector can be referred to as a market. Markets operate by themselves and allocate resources efficiently, but they're not perfect. Government regulation of the private sector is justified under two circumstances: when flaws appear in the market place that produce undesirable consequences and when adequate social, political, and other government regulation exists.
When functioning perfectly, the competitive market determines which of society's resources can be used most efficiently in producing the goods and services people want. This market mechanism is appealing in our democratic society because, through it, social welfare can be advanced without central government control. Its very effective, but when it fails it needs to be corrected.
An example of market failure when government is needed is the peculiar case of the natural monopoly. This arises when a firm can supply the whole market with a good or service for less money than any combination of smaller firms. Government regulation is needed to prohibit the firm from restricting output and raising prices with no fear of competition. Local public utilities are examples of natural monopolies.
Price fixing is an act that would be attempted by large firms if there was no penalty. A large firm could also cut prices to levels so low that survival for smaller firms would be impossible.
Regulation is needed so businesses causing externalities can be held accountable for them. By doing this, a steel mill that dumps its waste into a town's water supply would have to purchase waste removal equipment.
Government regulation is needed to make businesses provide enough information so the public can make informed choices. Product quality and content fall into this category. All those ingrediants we read on labels of cans and boxes in the supermarket have to be there because the government says so. Information that has to be disclosed can also be industrial safety practices and health hazards.
Other reasons for regulation are protecting individual rights and privacy. People can enjoy the benefits of the elimination of discrimination in employment and have confidence when investing since they're protected from fraud.
National problems not effectively resolvable by state and local governments include regulations to protect American farmers and steel workers from foreign companies selling products under cost in U.S. markets. In international trade, the government has acted to correct unfair trade practices in foreign countries that restrict U.S. exports. Why should we regulate natural monopolies?
The government should regulate natural monopolies because dividing them into smaller firms would actually cost customers more money. If the electric company had two separate companies, each with their won power source and lines, this would lead to a near doubling of price. Most countries agree that a natural monopoly is inevitable so after their birth, the problem becomes what's the price going to be. A price set to low, for example a marginal based price isn't wise due to the negative profits it would produce. The solution usually used is to let the government operate the service. In the eclectic company case, the answer would be to set a price equal to marginal cost and to provide a lump-sum subsidy to keep the electric company in operation.
The natural monopoly should be regulated because a private monoploy would have the ability to set...
Cited: 1. www.investorwords.com
2. P. Areeda, Antittrust Law. pg1436, 1986.
4. Greenspan, Alan. Antitrust. memo dated 6-12-98.
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