Government and business: an overview - Business Environment

In considering reasons for government intervention in the economy, economist shave traditionally pointed to the problem of ‘market failure’. This is the notion that if left entirely to their own devices, markets can operate in a way which is not always economically or socially desirable. To this extent interventionist policies can be portrayed as an attempt by governments of all political complexions to deal with the problems inherent in the operation of free markets.
The key areas of market failure are well known. Primary concerns include:

  1. The unwillingness of markets to produce goods and services which are either unprofitable or which it is not practical to provide through private means (i.e.‘public goods’ such as defence, social services and so on).
  2. The likely under-provision of certain goods and services felt to be of general benefit to the community (i.e. ‘merit goods’ such as education, libraries and so on).
  3. The failure to take into account the external costs and benefits of production or consumption (i.e. externalities such as pollution, congestion and so on).
  4. The danger of monopoly power if businesses can be freely bought and sold.
  5. The under-utilization of economic resources (e.g. unemployment resulting from demand deficiency, new technology or structural or frictional problems).
  6. The tendency for output to be determined and distributed on the ability to pay rather than on the basis of need or equity.

Government responses to these problems have normally taken a number of forms, including public ownership, legislation and administrative or fiscal regulation, and examples of all these approaches can be found to a greater or lesser extent in all countries. In recent years, however, under the influence of economists of the ‘new right’, governments have begun to take steps to disengage the state from some of its activities (e.g. public ownership) and have increasingly turned to market solutions to problems emanating primarily from the operation of the market system itself (e.g. schemes to charge for the use of roads which are heavily congested).

While all forms of government intervention in the economy invariably have direct or indirect consequences for businesses, it is possible to distinguish certain policies which are designed specifically to influence the industrial and commercial environment sometimes described as ‘industrial policies’. In the United Kingdom and elsewhere, these have typically included:

  • attempts at direct industrial intervention (e.g. the establishment of the National Enterprise Board);
  • privatization policies;
  • policies relating to competition and monopoly control; and
  • policies designed to influence industrial location and to encourage economic regeneration at different spatial levels.

Though it cannot be claimed that such measures amount to a single and coherent policy for business, nevertheless they indicate that successive governments accept they have an important role to play in shaping the environment in which private businesses function. Competition and privatization policy tend to focus on the operation of markets and on the benefits which derive from private provision under a competitive market structure. Government spatial policies the subject-matter of this chapter are mainly concerned with addressing the problems of regional disparities in income, employment and output, and the associated problem of localized economic decline as businesses fail or decide to relocate their premises.


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