Government Regulation

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    Government Regulation

    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).

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