These are used to:
- Promote competition.
- Resolve externalities where market failure exists:
- Provision of public goods.
- Taxing demerit goods.
- Enforce law and order.
Influence the location of firms:
- Prevent overcrowding in cities.
- Prevent regions from being neglected.
Governments do not desire oligopolistic or monopolistic markets as such markets are uncompetitive when compared with competition based markets. Often, a government will restrict the formation of such markets by:
- Breaking up larger firms into smaller ones
- Providing incentive for other firms to set up in the market
- Preventing merges that may prove detrimental to competition
How does the government regulate private enterprises?
- Investigate existing monopolies and suggesting ways in which competition may be introduced into these monopolist-dominated markets.
- Investigate proposed mergers and prevent such merges from taking place if they are believed to be detrimental to competition.
Influencing the Location of Firms:
Why is this done?
- o Some regions may be economically depressed, usually due to the decline of a traditional industry (this may lead to regional unemployment).
- o Some regions may be overcrowded with too much pollution, traffic congestion, insufficient housing and public services as a result of too many firms choosing to set up in the said regions.
How is this done?
Give firms incentives to set up in depressed regions:
- Low loan interest rates.
- Grants for the construction of infrastructure.
- Grants for the training of workers.
- Tax holiday/allowance.
- Low rent/free premises.
- By building and improving the infrastructure present in the said depressed region.
- Persuade firms in congested regions to move to depressed regions (stop granting licenses to operate in a congested region).