543 33 Powerpoint-slidesChap 12 Business Environment (1)

© Oxford University Press 2014. All rights reserved.

B.N. Ghosh

Business Environment


Chapter 12

Role of Government


Learning Objectives• The role of government in the development of business environment

• Government measures to tackle market-failure problem

• Government regulations and controls

• The theory of regulation and regulatory failures


Role of government in development of business environment

• An underdeveloped or developing country cannot attain prosperity unless the state intervenes or takes an initiative.

• The state has to play an important role in social development as well as industrial growth.

• The main obstacles in the way of economic progress of least developed countries (LDCs) are the lack of basic amenities such as power communication, transportation, irrigation facilities, education, and research.

• To achieve economic prosperity, the provision of economic and social overhead capital is essential.





The state must provide the following facilities to attaineconomic and industrial development.

• Become Self-sufficient• Reduce Cost of Production• Provide for Shortage of Capital and Manage the Workforce• Invest in Human Capital and Promote Education• Support Agriculture• Check Disparity in Wealth and Income• Adopt Suitable Monetary and Fiscal Measures• Proper Allocation and Stabilization• Efficiency–Equity Trade-off• Merit Goods



• Infrastructure and Institutional Development

• Minimizing Insecurity in Doing Business

• Bureaucratic Delays

• Import- and Export-related Aid

• Protection to Business and Making It More Competitive and Contestable

• Upgradation of Technology and Focus on Innovation

• Structural Factors to be Made Pro-business

• Creation of New Value System in Business


Provide for shortage of capital and manage the workforce

• For the purpose of macroeconomic development, and to eradicate unemployment, the state should adopt simultaneously labour- and capital-intensivetechniques.


Invest in Human Capital and Promote Education

• Investment in human capital is highly productive in underdeveloped countries.

• An underdeveloped country requires technicians, doctors, teachers, engineers, and the like, who will contribute positively towards increasing the flow of goods and services, thereby accelerating the tempo of industrial development.


Adopt suitable monetary and fiscal measures

In the initial stage of economic growth, an underdeveloped country should create economic surplus from the agricultural sector. At the same time, the institutions should be developed to draw a substantial part of the wealth of agriculture to prevent it from being used up in unproductive consumption.


Minimizing insecurity doing business

Terrorism and insurgency are big obstacles in the Indian business environment.

The government needs to make the lives of business people safe in India. It is also the situation in many other developing countries including Pakistan, Iraq, Afghanistan, Syria, and so on.


Protection to business and making it more competitive and contestable

• A full-fledged competitive environment stands for zero level of wastages and maximum possible level of output, employment, and income.


Government measures to tackle market-failure problem

Market failure occurs when the economy cannot function on the basis of the rules of market as dictated by price mechanism or demand–supply construct. In the case of market failure, the following measures can be adopted by the government.

• Imposition of a Corrective Pigovian Tax

• Government Regulation

• Market for Pollution Rights

• Internalization of Externalities

• Creating Property Rights


Government regulation and control

The following are the basic objectives of regulations:

Bring to limelight any hidden unethical issue or issues regarding which the public is not aware. It is resorted to in order to make the public aware.

Prevent market failure (i.e., to regulate the market in such a way that the market efficiently operates).

Overcome the problems that are responsible for the market failure. Ensure social welfare and public interest along with business

development.


The theory of regulation A policy of competition will be desirable for the business sector in the following cases.

• Regulation of Monopoly Power• Price and Output

• Profit• Industries with Externalities• Product Quality• Social Inequalities

• Asymmetric Information

• Banking and Finance• Capitalist Regulation


Profit

• Profit may have to be regulated through a number of ways such as regulation of markup and fixed rate of return on investment based on the average rate obtained in the industrial sector in comparison with the international standard.


Asymmetric Information

• Rational ignorance is a situation where the cost of information is much higher than the apparent benefit from the deal, so people try to remain ignorant .


Regulatory failuresThe first source of regulatory failure is the conflicting goals of regulations. Some of these conflicting objective are:

• Conflicting Goals of Regulations

• Problems of Regulations

• Over-regulation


Problems of regulation

The capture theory of regulation

• Although ministers (legislators) are the agents of the people (principal) and should always try to further people’s interests, they in reality cannot and do not always do that.

• Personal interest may clash with national interest, and in many cases, the former gets precedence over the latter .

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543 33 Powerpoint-slidesChap 12 Business Environment (1)