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The Role of Government and Regulation

The role of government in business is one of the most contentious issues in politics, and ideas about the role that government should play make up the majority of difference between political ideologies in the United States. The government has two main functions: one as a provider and one as a regulator. 

Government as a Provider

As a provider, the government provides goods and services such as roads and schools. As a consequence, it also has a role in redistributing income. Because consumers drive the economy, the government plays a role in ensuring that workers are employed. They do this through the social safety net, employing people themselves, and by providing tax incentives and subsidies to businesses to employ workers. The government also helps stabilize the economy through fiscal and monetary policy. 

Government as a Regulator

As a regulator, the government legislature and judicial branch work to protect consumers (the UCC), investors (SOX), workers (labor laws) and the environment. It also supports the legal framework that supports competition. It does this by enforcing agreements (ie. protecting against breach of contract for example), by protecting property rights (especially intellectual property like copyright, patents and trademarks now), and by maintaining competition through antitrust law (regulating price fixing, collusion and monopolies). 

Have you ever heard of the Tea Party? Many people believe that the government's role is too big - that regulation makes business more difficult, and in order to be a provider, the government taxes too much and distorts the market. The argument is that business makes everyone better off when it is more efficient - new, better, and more affordable products are created and more people can be employed. Government makes business inefficient, making people worse off. There are also other regulation-related issues.

Regulation-Related Issues 

(1) Rent seeking: This is when businesses or other interests lobby for laws that are favourable to their industry. Lobbying costs money, and all of these resources spent to get favourable laws past contribute to the cost of regulation - they are simply a waste. When laws are passed in your favour, you make money on what is called 'economic rent.' Economic rent is made when an income received is above what would be needed to keep a factor of production in current use. For example, the company that published your textbook would probably still be in the publishing business if it could only sell each textbook they wrote for $30. However, because of favourable copyright laws, they are able to charge $100/textbook. We call the excess $70 that the company makes economic rent. Economic rent is how most rich people get rich. 

(2) Capture: Over time interests lobby for existing, legitimate regulation to change in their favour. When an interest is succesful, we say that a legitimate regulation has been "captured" by an interest for its own gain. We can then say that a regulation is no longer legitimate.

(3) Moral hazard: When we insure people against losses, people might take greater risk then they normally would. This was a big part of the argument against bailing out the banks during the 2008 financial crisis. If banks know they are too big to fail, and are going to be bailed out, they might take unnecessary risks knowing the the public will absorb the costs. 

(4) Advocacy science: Interests produce information selectively and in a manner that supports their cause. For example, the Tobacco industry supports studies that suggest there are no health effects of smoking. 

Many of these issues have their roots in political or economics disciplines, but it is still important to consider the role of government and the role of regulation from a business point of view. Business philosophy looks at what the role of business is in society. Business ethics uses these ideas to help us make decisions about what is right and wrong in business. The government and regulation are then used to impose contraints on businesses to ensure that their bahviour is ethical. All three of these topics are therefore inherently linked. 

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