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1. Explain why government regulation is needed, citing the major reasons for

government involvement in a market economy.

The consolidation of U.S. industry into increasingly powerful corporations spurred

government intervention to protect small businesses and consumers. In 1890, Congress enacted

the Sherman Antitrust Act, a law designed to restore competition and free enterprise by breaking

up monopolies. In 1906, it passed laws to ensure that food and drugs were correctly labeled and

that meat was inspected before being sold. In 1913, the government established a new federal

banking system, the Federal Reserve, to regulate the nation's money supply and to place some

controls on banking activities.

The largest changes in the government's role occurred during the "New Deal," President

Franklin D. Roosevelt's response to the Great Depression. During this period in the 1930s, the

United States endured the worst business crisis and the highest rate of unemployment in its

history. Many Americans concluded that unfettered capitalism had failed. So they looked to

government to ease hardships and reduce what appeared to be self-destructive competition.

Roosevelt and the Congress enacted a host of new laws that gave government the power to

intervene in the economy. Among other things, these laws regulated sales of stock, recognized

the right of workers to form unions, set rules for wages and hours, provided cash benefits to the

unemployed and retirement income for the elderly, established farm subsidies, insured bank

deposits, and created a massive regional development authority in the Tennessee Valley.

Many more laws and regulations have been enacted since the 1930s to protect workers

and consumers further. It is against the law for employers to discriminate in hiring on the basis of

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age, sex, race, or religious belief. Child labor generally is prohibited. Independent labor unions

are guaranteed the right to organize, bargain, and strike. The government issues and enforces

workplace safety and health codes. Nearly every product sold in the United States is affected by

some kind of government regulation: food manufacturers must tell exactly what is in a can or

box or jar; no drug can be sold until it is thoroughly tested; automobiles must be built according

to safety standards and must meet pollution standards; prices for goods must be clearly marked;

and advertisers cannot mislead consumers.

By the early 1990s, Congress had created more than 100 federal regulatory agencies in

fields ranging from trade to communications, from nuclear energy to product safety, and from

medicines to employment opportunity. Government regulation was justified on the theory that

telephone companies, like electric utilities, were natural monopolies. Competition, which was

assumed to require stringing multiple wires across the countryside, was seen as wasteful and

inefficient. That thinking changed beginning around the 1970s, as sweeping technological

developments promised rapid advances in telecommunications. Independent companies asserted

that they could, indeed, compete with AT&T. But they said the telephone monopoly effectively

shut them out by refusing to allow them to interconnect with its massive network.

Telecommunications deregulation came in two sweeping stages. In 1984, a court effectively

ended AT&T's telephone monopoly, forcing the giant to spin off its regional subsidiaries. AT&T

continued to hold a substantial share of the long-distance telephone business, but vigorous

competitors such as MCI Communications and Sprint Communications won some of the

business, showing in the process that competition could bring lower prices and improved service.

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In 1996, Congress responded by passing the Telecommunications Act of 1996. The law

allowed long-distance telephone companies such as AT&T, as well as cable television and other

start-up companies, to begin entering the local telephone business. It said the regional

monopolies had to allow new competitors to link with their networks. To encourage the regional

firms to welcome competition, the law said they could enter the long-distance business once new

competition was established in their domains.

At the end of the 1990s, it was still too early to assess the impact of the new law. There

were some positive signs. Numerous smaller companies had begun offering local telephone

service, especially in urban areas where they could reach large numbers of customers at low cost.

The number of cellular telephone subscribers soared. Countless Internet service providers sprung

up to link households to the Internet. But there also were developments that Congress had not

anticipated or intended. A great number of telephone companies merged, and the Baby Bells

mounted numerous barriers to thwart competition. The regional firms, accordingly, were slow to

expand into long-distance service. Meanwhile, for some consumers -- especially residential

telephone users and people in rural areas whose service previously had been subsidized by

business and urban customers -- deregulation was bringing higher, not lower, prices.

2. Justify the rationale for the intervention of government in the market process in the

U.S.

The government may choose to intervene in the price mechanism largely on the grounds

of wanting to change the allocation of resources and achieve what they perceive to be an

improvement in economic and social welfare. All governments of every political persuasion

intervene in the economy to influence the allocation of scarce resources among competing uses.

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The main reasons for policy intervention are: to correct for market failure, to achieve a more

equitable distribution of income and wealth, and to improve the performance of the economy.

Markets cannot exist without a government to protect property rights, enforce contracts and settle

disputes all of which is intervention. This would benefit the economy in variety of ways. Firstly,

government regulations allow businesses to remain in the private hands while removing some of

the worst abuses of pure capitalism. Extremely wealthy people or companies have the ability to

control large sections of the economy because of shrewd business dealings. Only Government

involvement can fix that. When a producer has a monopoly, the consumer is no longer sovereign,

prices are not set by supply and demand, and therefore the system cannot function effectively. As

a mixed economy there is competition between companies, but we need government regulation

to ensure that these types of monopolies do not exist. A safe amount of government intervention

would result in higher incomes, production and employment, which would then lead to

expansion. Limited government involvement prevents crises such as inflation, unemployment

and depression. Without government the strong will take what they want from the weak and

there will be no reason to voluntarily exchange good and services which is the sole purpose of

buying and selling. There is a clear economic case for government intervention in markets where

some form of market failure is taking place. Government can justify this by saying that

intervention is in the public interest. Basically market failure occurs when markets do not bring

about economic efficiency. There are plenty of reasons why the normal operation of market

forces may not lead to economic efficiency: public goods, merit goods, externalities and

inequalities.

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Public goods are not provided by the free market because of their two main

characteristics. The first, non-excludability is where it is not possible to provide a good or

service to one person without it thereby being available for others to enjoy. Second, non-rivalry

is where the consumption of a good or service by one person will not prevent others from

enjoying it. Because of their nature the private sector is unlikely to be willing and able to provide

public goods. The government therefore provides them for collective consumption and finances

them through general taxation.

Merit Goods are those goods and services that the government feels will under-consume

are thought to be subsidized or provided free at the point of use. Both the public and private

sector of the economy can provide merit goods & services. Consumption of merit goods is

thought to generate positive externality effects where the social benefit from consumption

exceeds the private benefit. Few modern markets meet the stringent conditions required for a

perfectly competitive market. The existence of monopoly power is often thought to create the

potential for market failure and a need for intervention to correct for some of the welfare

consequences of monopoly power.

The potential market failures arising from externalities are in the absence of clearly

defined property rights for those agents operating in the market. When property rights are not

clearly defined, market failure is likely because producers & consumers may not be held to

account. Positive externalities can also justify intervention if goods are under-consumed (social

benefit > private benefit).

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Market failure can also be caused by the existence of inequality throughout the economy.

The wide differences in income and wealth between different groups within our economy; leads

to a wide gap in living standards between affluent households and those experiencing poverty.

Society may come to the view that too much inequality is unacceptable or undesirable.

3. Assuming that the merger faces some threats and that the industry decides on self-

expansion as an alternative strategy, describes the additional complexities that would

arise under this new scenario of expansion via capital projects.

Whatever method a company chooses to utilize to expand, its owners will likely face a

combination of potentially issues as they try to grow their business in a smooth and productive

manner. Growing too fast is common that strikes ambitious and talented entrepreneurs who have

built a thriving business that meets a strong demand for a specific set of goods and/or services.

Success is wonderful, of course, but rapid growth can sometimes overwhelm the ill-prepared

business owner. In other cases, a business may undergo a period of feverish expansion into

previously untapped markets, only to find that securing a meaningful share of that market brings

them unacceptably low profit margins. Effective research and long range planning can be helpful

to relieve the problems often associated with rapid business expansion.

Recording and other infrastructure needs is essential for small businesses that are

undergoing expansion to establish or update systems for monitoring cash flow, tracking

inventories and deliveries, managing finances, tracking human resources information, and

myriad other aspects of the rapidly expanding business operation. Many software programs

currently available in the marketplace can help small businesses implement systems designed to

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address these recordkeeping requirements. In addition, growing enterprises often have to invest

in more sophisticated communication systems in order to provide adequate support to various

business operations.

Expansion capital is often required for small businesses experiencing growth. Finding

expansion capital can be a frustrating experience for the ill-prepared entrepreneur, but for those

who plan ahead, it can be far less painful. Businesses would have to revise their business plan on

an annual basis and update marketing strategies accordingly so that you are equipped to secure

financing under the most advantageous terms possible.

Growing companies will almost always have to hire new personnel to meet the demands

associated with new production, new marketing campaigns, new recordkeeping and

administrative requirements, etc. Careful hiring practices are always essential, but they are even

more so when a business is engaged in a sensitive period of expansion. Business expansion also

brings with it increased opportunities for staff members who were a part of the business in its

early days. The entrepreneur who recognizes these opportunities and delegates responsibilities

appropriately can go far toward satisfying the desires of employees who want to grow in both

personal and professional capacities. Small business owners also need to recognize that business

growth often triggers the departure of workers who are either unable or unwilling to adjust to the

changing business environment. Indeed, some employees prefer the more relaxed, family-type

atmosphere that is prevalent at many small business establishments to the more business-like

environment that often accompanies periods of growth. Entrepreneurs who pursue a course of

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ambitious expansion may find that some of their most valuable and well-liked employees decide

to instead take a different path with their lives.

Good customer service is often a significant factor in small business success, but

ironically, it is also one of the first things that fall by the wayside when business growth takes on

a hectic flavor and sometimes you have a hard time getting back to clients in a timely fashion.

The same customer service that caused growth in the first place becomes difficult to sustain.

Under such scenarios, businesses not only have greater difficulty retaining existing clients, but

also become less effective at securing new business. A key to minimizing such developments is

to maintain adequate staffing levels to ensure that customers receive the attention and service

they demand (and deserve). On many occasions, ownership arrangements that functioned fairly

effectively during the early stages of a company's life can become increasingly problematic as

business issues become more complex and divergent philosophies emerge.

Another common scenario that unfolds during times of business growth is that the owners

realize that they have different visions of the company's future direction. One founder may want

to devote resources to exploring new marketing strategies, while the other may be convinced that

consolidation of the company's presence in existing markets is the way to go. In such instances,

the departure of one or more partners may be necessary to establish a unified direction for the

growing company. Embarking on a strategy of aggressive business expansion typically entails an

extensive sacrifice of time—and often of money—on the part of the owner (or owners).

Entrepreneurs pondering a strategy of business growth have to decide whether they are willing to

make the sacrifices that such initiatives often require. As companies grow, entrepreneurs often

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find it increasingly difficult for them to keep the business grounded on the values that were

instituted in its early days. Owners are ultimately the people that are most responsible for

communicating those values to employees. But as staff size increases, markets grow, and

deadlines proliferate, that responsibility gradually falls by the wayside and the company culture

becomes one that is far different from the one that was in place—and enjoyed—just a few short

years ago. Entrepreneurs need to make sure that they stay attentive to their obligations and role

in shaping company culture. Businesses grow in size they often encounter problems that

increasingly require the experience and knowledge of outside people. Entrepreneurs guiding

growing businesses have to be willing to solicit the expertise of accounting and legal experts

where necessary, and they have to recognize their shortcomings in other areas that assume

increased importance with business expansion.

4. Analyze how the different forces will come together to create a convergence between

the interests of stockholders and managers.

There are many forces which will tend to create a convergence between the interests of

stockholders and managers, and thus cause managers to be interested in maximizing a

corporation's profits or value. There are four mechanisms for aligning the interests of managers

and stockholders. Incentive compensation systems serve as one means of aligning the interests of

shareholders and managers. These systems can take many forms and include providing salaries,

bonuses, performance shares, and stock options to reward superior performance and to penalize

poor performance. Shareholders in acquired firms may or may not benefit substantially. Gains

for this group typically amount to 20 percent in mergers and 30 percent in tender offers above

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the market prices prevailing a month prior to the merger announcement. The gains to acquiring

firms are difficult to measure. The best evidence suggests that shareholders in bidding firms gain

little. Turning managers into substantial owners is likely to reduce the incidence of agency

conflicts. Managers may have incentives to increase firm size at the potential expense of

shareholder wealth. In many corporations, management remunerations are tied to the

performance and managers frequently are awarded stock options which gain value as the price of

shares rises. Thus, managers will have an interest in maximizing stockholder welfare. In certain

situations the objectives of management may differ from those of the firm’s stockholders. In a

large corporation whose stock is widely held, stockholders exert very little control or influence

over the operations of the company. When the control of a company is separate from its

ownership, management may not always act in the best interests of the stockholders. Managers

sometimes are said to be "satisfiers" rather than "maximizers"; they may be content to "play it

safe" and seek an acceptable level of growth, being more concerned with perpetuating their own

existence than with maximizing the value of the firm to its shareholders. The most important

goal to a management of this sort may be its own survival. It is true that in order to survive over

the long run, management may have to behave in a manner that is reasonably consistent with

maximizing shareholder wealth. Nevertheless, the goals of the two parties do not necessarily

have to be the same. Maximization of shareholder wealth, then, is an appropriate guide for how a

firm should act. When management does not act in a manner consistent with this objective, we

must recognize this as a constraint and determine the opportunity cost. This cost is measurable

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only if we determine what the outcome would have been had the firm attempted to maximize

shareholder wealth.

As a result, it may be unwilling to take reasonable risks for fear of making a mistake,

thereby becoming conspicuous to the outside suppliers of capital. In turn, these suppliers may

pose a threat to management’s survival. Outside investors, especially those holding a large

proportion of the firm’s shares can use their voting power to influence the company’s actions and

the composition of its board of directors. Top managers are subject to achieving certain

performance standards. If they are unable to reach these standards, the board of directors or other

executives can dismiss these managers. Their replacements may be more effective in acting in

the best interests of the stockholders than are the existing managers. Underperforming firms may

become takeover targets. Competitive pressures could lead to stock price declines for

nonperforming company, and again result in take overs, proxy contest, etc. Corporate shares are

not only owned by widely dispersed stockholders but by large institutional holders such as:

banks, insurance companies, mutual funds, pension funds, etc. These organizations employ

analysts who continually study stock performance. Nonperforming companies would be sold

from these institutions' portfolios, and lead to decreased prices of these stocks. This could lead to

the dismissal of present management. Managers of such firms may not be providing sufficient

value to their stockholders. The acquisition of a target, especially in a hostile takeover, often

results in subsequently firing managers of the acquired firm. Thus, the threat of acquisition can

be an incentive for managers to make decisions that are in the best interests of their stockholders.

5. Speculate about the implications for the goals of the firm as to whether to maximize

the industry’s profits or to create more value for the shareholders.

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The object of the firm is to maximize its value to its shareholders. Value is represented by

the market price of the company’s common stock, which, in turn, is a reflection of the firm’s

investment, financing, and dividend decisions. Maximization of profits is regarded as the proper

objective of the firm, but it is not as inclusive a goal as that of maximizing shareholder wealth.

For one thing, total profits are not as important as earnings per share. A firm could always raise

total profits by issuing stock and using the proceeds to invest in Treasury bills. Even

maximization of earnings per share, however, is not a fully appropriate objective, partly because

it does not specify the timing or duration of expected returns. Is the investment project that will

produce $100,000 return 5 years from now more valuable than the project that will produce

annual returns of $15,000 in each of the next 5 years? An answer to this question depends upon

the time value of money to the firm and to investors at the margin. Few existing stockholders

would think favorably of a project that promised its first return in 100 years. We must take into

account the time pattern of returns in the analysis.

Another shortcoming of the objective of maximizing earnings per share is that it does not

consider the risk or uncertainty of the prospective earnings stream. Some investment projects are

far more risky than others. As a result, the prospective stream of earnings per share would be

more uncertain if these projects were undertaken. In addition, a company will be more or less

risky depending upon the amount of debt in relation to equity in its capital structure. This risk is

known as financial risk; and it, too, contributes to the uncertainty of the prospective stream of

earnings per share. Two companies may have the same expected future earnings per share, but if

the earnings stream of one is subject to considerably more uncertainty than the earnings stream

of the other, the market price per share of its stock may be less.

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For the reasons above, an objective of maximizing earnings per share may not be the

same as maximizing market price per share. The market price of a firm’s stock represents the

focal judgment of all market participants as to what the value is of the particular firm. It takes

into account present and prospective future earnings per share, the timing, duration, and risk of

these earnings, and any other factors that bear upon the market price of stock. The market price

serves as a performance index or report card of the firm’s progress; it indicates how well

management is doing on behalf of its stockholders.

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References

Henkoff, Ronald. "Growing Your Company: Five Ways to Do It Right!" Fortune. November 25,

1996.

Koshner, Erick L. "A Market-Focused and Customer-Driven Approach to Growth." Human

Resource Planning. June 1997.

McGarvey, Robert. "Merge Ahead: Before You Go Full-Speed into a Merger, Read This."

Entrepreneur. October 1997.

Michaels, Robert J., Transactions and Strategies: Economics for Management, Cengage

Learning, 1st edition 2011

Nelton, Sharon. "Coming to Grips With Growth." Nation's Business. February 1998.

Weinzimmer, Laurence G. Fast Growth: How to Attain It, How to Sustain It. Dearborn, 2001.