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Introductory Economics and Finance: Why Governments Regulate Firms and Markets - Assignment Example

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The author of the paper titled "Introductory Economics and Finance: Why Governments Regulate Firms and Markets" examines the rationale behind government regulation, theoretical base of regulation. The author also describes evidence of regulation…
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Introductory Economics and Finance: Why Governments Regulate Firms and Markets
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Download file to see previous pages By government regulation, it is meant by the rules administered by a government or government agency to influence any economic activity which determines the price, types, and standards of products, and most importantly the conditions under which the entry and exit of the firms are possible.

Like death, it is impossible to keep away from regulation in about every aspect of daily life. The business regulation may be classified into two- economic and social (Litan). The economic regulation deals with price controls and the entry limits of the firms into markets. The second type regulation mostly deals with externalities (the outside influences of the company or firm which may or may not be decided by them)

Examples of this type of regulation range from employee safety standards to product quality controls, requirements related to financial disclosure and unionization rules to restrictions related to environmental issues.

The government regulation of firms and businesses can greatly be established for a number of reasons. Unrestricted and unregulated free competition may lead to the existence of a single firm that controls the whole market (that is, the situation of ‘natural monopoly may arise) and in that situation, the monopolist can control the price, restrict the output and discriminate the price among buyers. The monopolies and oligopolies are needed to be regulated because they produce up to the point where they can maximize production which is often less than the efficient output.

Again, regulation can be justified in order to prevent the unrestricted and “excessive” competition. The perfect competition may sometimes result in swings in output and prices which may too severe and too costly to consumers as well as producers. Hence the regulation is said to be necessary to maintain stability and equity of the firms in the market.

In some markets government intervention between the consumers and sellers becomes essential to protect the interests of either or both from certain conditions in the absence of regulation. ...Download file to see next pagesRead More
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