Government in the market economy

Government in the Market Economy

The Mercedes-Benz case study describes the Mercedes plant developed in the state of Alabama and the conditions it took place in. Although the state of Alabama did not seem to be very appealing to the German investors, government's implication helped this state to become a very strong competitor for another state, North Carolina, and to eventually win the competition and the foreign investment from Mercedes.

Although North Carolina governor showed a very high interest in the German investor, Mercedes eventually preferred Alabama, given the immense benefits that the Alabama government was offering. These benefits include: $5 million for a welcome center near the factory, free 18 months employees training programs, state governments promised to buy large quantities of the four-wheel-drive recreational vehicles to be produced, the state government was also supposed to pick up the salaries of 1,500 Mercedes workers for the first year on the job (Hirschey). In addition to these financial advantages, the Alabama state government also approved lavish tax concessions, dubbed Alabama's Mercedes Law, and offered to buy over 2,500 Mercedes vehicles for state use. Mercedes was also allowed to escape over $9 million a year in property taxes and other fees. Alabama state government also offered Mercedes a great tax credit, available in advance in the form of an interest-free loan. Other than this, Mercedes also benefited from free advertising.

A. At a first glance, the $300 million in state aid, the 1,500 new jobs, and the $200,000 per job initial marginal social cost does not seem reasonable for Alabama's tax payers. In order to be reasonable, the minimum marginal social benefit must exceed the marginal social cost. Therefore, taxes and fees collected from the Alabama Mercedes Plant must exceed the $300 million state aid. The facts presented in this case study create the impression that the state of Alabama slightly overbid this project, as the Mercedes investment might have been overrated. The advantages and the benefits of this project were exaggerated. The party that will have the most to gain from this project is Mercedes, the German investor, who received enormous amounts of financial aid, incentives, free publicity, and good force of labor.

B. In market economies, governments are supposed to provide economic conditions for private enterprises to function effectively. However, the main purpose is to create an environment for a healthy national economy, in which all the parties are prosperous, not only private enterprises (USINFO, 2007). The main difference between market economies and planned economies lies on whether the influence of the government is used to preclude private decision (Wikipedia, 2007). The fact that the Mercedes bidding process took place at the state and local level of governments probably influenced the inducements for this project. In other words, a federal government probably would not have offered such favorable tax condition for the Mercedes plant implementation, being more preoccupied on the social welfare.

C. The state and local governments were definitely in favor of the Alabama Mercedes project, and the enormous amounts of money invested in this project by the Alabama government prove it. A benefit/cost analysis will seem more than favorable for any state government, leading to tax breaks that would positively influence industrial development. In other words, the local tax base at the state and local level would significantly change, in favor of investors.