Long-Term Investment Decisions

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). Complexities of Expansion via Capital Projects The possible challenge for the need to raise capital is the source of capital. In this case, there is likely to emerge a tussle between the company managers and shareholders.

The managers' easiest measure to raising capital would be to focus on the shareholders reserves. The shareholders will consider this as a compromise on their worth in business. Raising capital in a corporation is not an easy measure to undertake. There are a number of items that need to be evaluated. One is the cost of the capital, secondly the ease that the capital can be obtained and thirdly the expected return on capital.

Business managers will only settle to outside funding when they have a possible guarantee that the cost of capital will be met through the venture. This is without necessarily altering the company's profitability. Considerations for the source of capital require business shareholder to retain their worth. Stockholders will find it difficult to give their revenue dividends worth with no further considerations. The shareholders would prefer a company to offload more shares to raise capital than consider using the share reserve for the capital projects.

Consideration for introducing more shares into the market is a measure that requires and longer planning period and subject to regulations. This is a perspective that organization such as one that faces trouble with merger considers not ideal. Offsetting more shares to the market is also not a quick option since the time taken to sell off the share is substantially high. Ownership of the company can also easily change hands through shares.

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.