Chapter7-Government and Industry.ppt tax non org

Government industry

1. CHAPTER 7
1
Government and
Industry
Lectured by: Lao Poliveth
(BA. Economics and Math, MBA)

2. Overview
Why government policy is important for managerial
decision making.
Government policy affects firms in a multitude of ways
Managers need to know what these policy effects are
likely to be so that they can anticipate both the policies
and their effects
sometimes they can be proactive and influence such
policies in a number of ways, particularly if they
represent a large firm or an important lobby group
Manager must understand objectives of
government policy.
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3. Objectives of Government
Policy
Macroeconomic objectives
Full employment
Economic growth
Price stability
Balance of payments stability
Microeconomic objectives
The correction of market failure
The redistribution of income economic
objectives
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4. 4
Functions of Government in a Market
Economy
Provide laws and legal institutions that define and
enforce property rights or provide legal and social
framework
Enforceable property rights increase incentive to
invest and trade, patents, copyrights, trademarks
Enforceable contracts reduce transactions costs
Greater gains from trade, more wealth

5. Maintain competition in markets by ensuring
no one seller dominates
Redistribution of income and wealth
Reallocation of resources
Stabilization of the aggregate economy
Regulation of natural monopolies
Seek to correct market failure
5
Functions of Government in a Market
Economy

6. RedressingMarket Failures
Market failure is the situation where the market
mechanism fails to allocate resources efficiently.
Externalities: costs or benefits imposed on
involuntary parties
Public goods
non-rival consumption
failure of exclusion principle (free riders)
Monopoly
Informational failures

7. Externalities
Externalities:
Externalities exist when benefits or costs fall on others
who do NOT contribute or are reimbursed.
Some externalities are welcome and others are disliked.
Negative Externalities
Air, noise, and water pollution are familiar negative
externalities.
Negative externalities cause overproduction because
sellers do not consider all social costs.
Positive Externalities
Education generates positive externalities.
Positive externalities cause underproduction because
sellers cannot reflect the full social value of production in
the prices charged.

8. Solving Externalities
Government Solutions
Government sometimes controls the effects of
externalities by regulation.
Taxes are often used to correct negative externalities.
Market Solutions
Markets can provide effective penalties to moderate
negative externalities.
Markets can give incentives for the production of
goods and services with positive externalities.

9. Public Goods
Rivalry and Exclusion
Public goods are nonrival in consumption.
Use by certain individuals does not reduce availability for
others.
Public goods tend to be nonexclusionary.
It is often impossible to confine benefits to paying customers.
Free Riders
Free-riders enjoy benefits at no cost.

10. Examples of government
regulation
Antitrust legislation prohibiting certain practices
The purpose of antitrust laws
economic efficiency
limit power of large firms and protect smaller firms
Case study: Microsoft fined by European
Commission in 2004, but debate surrounds the
decision
Environmental protection laws and agencies
Financial disclosure for companies with publicly
traded stock
Intellectual property, labor, safety, and other
laws
Utilities regulation
Financial services regulation
Transportation industry regulation

11. Market for regulation insights
Regulators do not always behave in
obviously consistent ways
Unorganized consumers offer
regulators relatively little political
support
Political outcomes depend on relative
effectiveness of special interests
Government programs tend to benefit
small groups at the expense of large
groups

12. 12
Government Deregulation
Governments impose many restrictions on firms:
mergers, patents, licensing, or subsidies.
The stated intention of governments is to set
restrictions that promote social welfare, but they
sometimes benefit particular groups or
individuals.
Deregulationhas resulted in more competitive
environment and many companies have sought
to merge with other firms in order to survive and
grow
From the late 1970’s Many government
deregulated industries such as:
telecommunications
electric and gas utilities
airlines

13. 13
Mergers and Acquisitions
Incentives to merge
synergies in production
revenue enhancements
operating economies
financial economies
improved management
tax consequences
managerial power
diversification
market power
Factors that are instrumental in enhancing value of a
merger or acquisition
expected synergies
mergers that look for value
restructuring that includes divestitures of underperforming
businesses
tender offers (as compared to friendly mergers)

14. Optimal Allocation of Social
Resources
Pareto Improvement
If a public project makes at least one individual better off
and no one worse off, then the project is Pareto satisfactory.
When all such projects have been undertaken, the situation
is deemed Pareto optimal.
Marginal Social Costs and Benefits
Optimal allocation of social resources requires balancing
marginal social costs and benefits.
MSC = MSB at optimum.
Privatization
Public-sector resources are transferred to the private
sector in the hope that the profit motive might spur
higher product quality, better customer service, and
lower costs.

15. Managerial Implications
Government regulations can create
barriers to entry
directly (e.g., legal profession, mail
delivery)
indirectly (e.g., restaurant health
codes, imposition of payroll tax)
Importance of coalition formation
Business participation in political
process

16. 16
Doing Business with the
Government
Monopsony: a market in which there is only one
buyer. Example: the government procurement
office is often cited as a good example of a
monopsony
What influences government purchases:
government strategic plans
budget and program input from ministries
priorities set by the government
availability of appropriated funds
political party special mandated
surplus/deficit conditions
politics