Government regulation and its role in market economy efficiency

Long-Term Investment Decisions

Government Regulations

Government regulation borders within the mandated needs in the economy to strike a balance between the market activities and social welfare of the people. The role of government in the market has been seen as one that is indispensable in an economy where this balance is needful. Contrary to this argument, it has also been observed that government involvement in the market economy can to a large extent lead to sub-optimal results. It is agreeable however, that government intervention guarantee the social welfare and production of public goods. These are aspects that are not possible to achieve through the market system (Smith, 2012).

The main reasons for government regulation are to provide public goods such as security and public health and lighting. The production of certain necessary goods in the economy cannot be achieved through the market system owing to lack of a proper measure for payment. Some public necessary goods have a feature of non-excludability. It is impossible to provide these goods excluding those who have not paid from using them. The government regulation mechanism comes in to collectively provide the goods and create a payment mechanism that market cannot sustain (Eidenmuller, 2011).

Redistribution of income in the economy is also a function achieved through government intervention. The national role of the government is to ensure welfare to all and, where there is an imbalance, the government comes in to create balance. Failure of the market mechanism to assure welfare calls upon the government to participate in guaranteeing this welfare. The government partakes in the balancing activity through taxation. Welfare of the people is assured by government's effort to correct the failure of the market mechanism where negative externalities exist. The market mechanism is profit oriented where firms and corporations will seek the best measures to cut cost. The cost cutting measures may bring in an aspect of negative effect to people such as air and water pollution. The government regulation will regulate the market economy to reduce the negative externalities (Aghion, Algan, Cahuc, & Shleifer, 2010).

Justification for Government Intervention

Consumer protection is only possible through government intervention in the market economy. Corporations seeking to maximize profits may end up exploiting consumers in the absence of the government regulations. In this perspective, the government controls the production activities through standard setting and assessment. The standards control aspect is not achievable through the market mechanism of competition since there are chances for collusion among the producers (Aghion et al., 2010).

Mergers and monopoly through the market economy are highly possible creating opportunities for consumer exploitation through substandard goods and high prices. The government's role in this case is to oversee the mergers and control the market to obscure monopoly creations. The essence of market economy is to achieve optimal capacity in production an aspect that is likely to miss out where a monopoly exists (Eidenmuller, 2011). The intention of government regulation is to oversee the mergers and safeguard the interests of consumers.

Government intervention in the market is necessary as long as there is a growing need among the corporation of today to maximize profits at whatever cost. The consumer needs and welfare are at the hands of the corporation for as long as the government does not intervene. This concern, calls upon action by an intermediary body to guarantee welfare of the consumers is not eroded. Market economy is touted for its ability to bring in a competition where competition leads to low prices. Without government regulation, price stability is not achievable since, the increasing competition will lead to consistent low prices and thus price instability. In a case where regulations in the market are absent, lower quality products will be introduced to reflect the low prices the market offers (Eidenmuller, 2011).

Conflict and convergence of managers' and stockholder interests

Managers are known to have overall controlling interests over a company's affair. Stockholders have limited control over the actions of the managers despite the fact that they are the owners. Conflict between the two occurs when the parties seek to maximize their individual benefit. While, the stockholders seek to maximize profits, managers will seek to higher incomes, and higher allowances. Managers are likely to be against mergers as this compromise they job security. Stockholders will wish to minimize their risk by holding interest in as many business ventures as possible (Jensen, Michael, & Ruback, 2001).

To align this differences the individual need of the two parties needs to be met. One such measure to provide a commission-based mechanism to meet the high earning requirement by managers. Managers earning need to be pegged on their ability to raise high profits. This is where the pay package will increase by a percent of the profits raised in a financial period. This will guarantee that the interests of the stockholders are met since, higher profits mean higher dividend pay to the shares held (Jensen et al., 2001).

Other incentive may be rewarding the managers with shares to the company. The shares reward to the managers will work not only as a reward but also encourage them to incorporate the needs of their share growth in the company (Jensen et al., 2001). Managers will have to articulate their decision making to factor in the need for their pay package and the share growth in management decisions. This will mean that managers will seek to pursue goals that are profit oriented and, reflective of their pay package at the company.