July 30, 2007
What are the key reasons for Government regulation of the private sector?
In an economy there are two sectors, the public and private. The private sector, by definition, is the part of a nation's economy that isn't controlled by the government.(Investorwords). Several business organizations make up the private sector with the three basic ones being sole proprietorships, partnerships, and corporations. Most are for profit and part of that profit goes to the government in the form of taxes. The private sector can be referred to as a market. Markets operate by themselves and allocate resources efficiently, but they're not perfect. Government regulation of the private sector is justified under two circumstances: when flaws appear in the market place that produce undesirable consequences and when adequate social, political, and other government regulation exists.
When functioning perfectly, the competitive market determines which of society's resources can be used most efficiently in producing the goods and services people want. This market mechanism is appealing in our democratic society because, through it, social welfare can be advanced without central government control. Its very effective, but when it fails it needs to be corrected.
An example of market failure when government is needed is the peculiar case of the natural monopoly. This arises when a firm can supply the whole market with a good or service for less money than any combination of smaller firms. Government regulation is needed to prohibit the firm from restricting output and raising prices with no fear of competition. Local public utilities are examples of ...