I’m working on a economics discussion question and need an explanation and answer to help me learn.
Is it always necessary for government to intervene and internalize the profit and the cost externalities? Illustrate your answer using a real world example.
REPLY TO
1. The private sector is the country’s main economic force, but it requires government oversight. The role of the federal government in business is as old as the country itself. The government is given the authority to regulate some forms of commerce under the terms of the Constitution. Today’s business community still has a lot of leeway. To operate, most businesses must register with a state government. Corporations require a charter, while other types of businesses require additional registration. The purpose of this registration is usually to define the financial liability of the company’s owners. It limits their risk to the amount invested in that specific organization. Registration also enables the government to monitor companies as they carry out their other responsibilities in the business world. Businesses enter into agreements with other businesses. These contracts are enforced by the government. If one party fails or refuses to meet its obligations under a contract, the company will seek redress through the legal system. Businesses, like individuals, sue one another in court. An oral agreement can be a contract, but only a written agreement is usually provable. The government’s role in business includes consumer or customer protection. When a vendor fails to honor a guarantee, the buyer has legal recourse. Similarly, if a product causes harm to a person, the courts may hold the vendor or manufacturer liable. Another requirement imposed by the government on marketers is labeling. Employees are protected from discrimination by the Equal Opportunity Commission. The Occupational Health and Safety Administration is a Department of Labor agency. Its mission is to provide a safe and healthy workplace for all Americans. When a marketing transaction has an effect on a third party – someone other than the marketer and purchaser – this is referred to as an “externality.” The environment is frequently the third party. It is the responsibility of the government to regulate industry and thus protect the public from environmental externalities. Some revenue is taxed at the corporate level before being taxed again as personal income when distributed as dividends. This is perfectly acceptable because it balances the tax burden between the company and the individual. Governments at all levels tax businesses, and the revenue generated is a significant component of government budgets. The government requires companies to make financial information public, thereby protecting investors’ rights. It is debatable whether federal regulation has been adequate. In most cases, this is accomplished through filings with the Securities and Exchange Commission. (Greechie, 2019)
Governments have the ability to make significant changes to monetary and fiscal policy, such as raising or lowering interest rates, which has a significant impact on business. They can devalue the currency, which temporarily boosts corporate profits and share prices but eventually devalues the currency and raises interest rates. Governments can intervene by providing bailouts when companies or entire segments of the economy fail or threaten to undermine the entire economic system. Increased taxes, fees, and regulations can stymie businesses and entire industries. (Hall, 2021)
References
Greechie, S. (2019, March 12). Role of Government in Business. Retrieved from smallbusiness.chron:
https://smallbusiness.chron.com/role-government-bu…
Hall, M. (2021, October 7). Governments’ Influence on Markets. Retrieved from investopedia:
https://www.investopedia.com/articles/economics/11…
