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Unformatted text preview: Chapter 21 - understanding the business environment: the economics of regulation CHAPTER 21 UNDERSTANDING THE BUSINESS ENVIRONMENT: THE ECONOMICS OF REGULATION CHAPTER SUMMARY This chapter focuses on the economics of regulation. It starts by discussing why it is important for managers to understand the regulatory process. Three potential reasons for government intervention are presented (defining and enforcing property rights, redressing market failures, and redistributing wealth). The primary focus is on the economic theory of regulation which posits that regulation is demanded by special interest groups and supplied by self-interested politicians. Rational free riding on the part of voters allows well-organized coalitions to pass regulations that redistribute wealth in their favor. The chapter ends by discussing the managerial implications of this analysis and by presenting a case study World Motors. CHAPTER OUTLINE IMPORTANCE OF REGULATION TO MANAGERS Managerial Application: Europe Relaxes Its Labor Laws ECONOMIC MOTIVES FOR GOVERNMENT INTERVENTION Defining and Enforcing Property Rights Managerial Application: War and Hunger Managerial Application: Multinational Counterfeiting Redressing Market Failures Externalities Managerial Application: Alternative Dispute Resolution Managerial Application: Frivolous Lawsuits Managerial Application: Direct and Indirect Costs of the Food and Drug Administration Public Goods Monopoly Historical Application: Interstate Commerce Commission Informational Failures Managerial Application: Cost of RegulationProprietary Information Redistributing Wealth Managerial Application: Regulated Limos in Las Vegas ECONOMIC THEORY OF REGULATION Demand for Regulation: Special Interests Managerial Application: Special Interests and the Microsoft Antitrust Suit Supply of Regulation: Politicians Managerial Application: Political Support 21-1 Chapter 21 - understanding the business environment: the economics of regulation Managerial Application: Regulators Exhibit Self-Interest in Microsoft Antitrust Suit Incentives to Free-Ride and Form Coalitions Managerial Application: Washington Lobbyists Market for Regulation Managerial Application: Cost of ProtectionAutomobile Import Restrictions Managerial Application: Brazil Deregulates Airfares Deadweight Losses, Transaction Costs, and Wealth Transfers MANAGERIAL IMPLICATIONS Managerial Application: Conservative Choices of Accounting Methods Managerial Application: Why Do Ships Register in Liberia? Restricting Entry and Limiting Substitutes Managerial Application: Restricting Entry into European Retailing Managerial Application: Steel Producers vs. Steel Consumers Forming Coalitions On Business Participation in the Political Process SUMMARY TEACHING THE CHAPTER The material in this chapter builds on the fundamentals of economics presented in the first part of the text. In order to fully appreciate the chapter, students should have an understanding of how markets work and how market structure affects economic...
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