Objectives: Students will understand how the government attempts to regulate the marketplace through various laws. Students will also read and discuss various anti-competitive behaviors that the government is seeking to prevent in the economy.
Materials Required: Regulation Handout
Welcome back students. In this lesson, we are going to begin discussing regulation by the government in the economy. Before we continue, please print out the “Regulation Handout” on the main page of the website. That will be useful as we continue forward.
When we started talking about the government in the last lesson, you read that the government involves itself in the economy because the economy often needs intervention. While much of the previous units have painted the economy as a well-oiled machine, the fact is that the economy is run by people. Sometimes the will of the people hurts others and in some cases, the actions of a few in the economy hurt the many. The government intervenes because no one in any nation is well off without a healthy, striving economy (you’ll find that some of the world’s most powerful nations have healthy economies).
So let’s start this lesson by discussing the two types of regulation that the government does:
Social Regulation: tries to improve health and safety of the public, such as controlling unsafe working conditions and limiting the availability of dangerous productions. Usually this has some form of an economic impact.
Economic Regulation: controls price, output, the entry of new firms, and even the quality of service in industries were monopolies may appear. This also gives the government the ability to control natural monopolies.
Now firms obvious engage in these forms of regulation for good reason. They often do so to prevent what are known as anti-competitive behaviors—actions in the economy that hurt competition. A few examples of anti-competitive behaviors are as such:
Collusion/Cartels—when a group of firms come together and restrict prices and entry into a market. They often increase prices together and limit output in an economy.
Price fixing—an agreement among a group of firms to sell a product at a set price to force other businesses out of the market
Predatory Pricing—is the actions of sole firm to set prices below the market price to drive other, smaller firms out of business
This may not always be illegal. The form of this that is illegal is essentially forcing each consumer to pay their maximum price, which is different for each consumer. This practice is not allowed.
However, other forms of price discrimination—such as group pricing, coupons, haggling, bundling—are all legal.
In the case of the U.S. government, our government has not always had a large role in regulating the economy. For quite some time, the U.S. government had a fairly hands-off approach to the economy. They allowed firms to produce however they wanted. However, this proved to be a dangerous action in the economy, as you can read below:
In the late 19th century, the economic developments became widespread. Humanity saw breakthroughs in both technology with lead into a major accomplishment for all: a railroad system that increased in size between 1850-1890 from 9000 miles of track to 167,000 miles of track. This new railroad system reduced costs and made it so that firms could serve wider markets. However, there were declines in the market between 1873 and 1883 which concerned large manufacturers. Because firms produced on a large scale for relatively cheap, large scale firms began price wars with one another to win over customers. However, price wars lead into economic turmoil because the markets were not stabilized. Destabilization effects everything from the top-down in a firm. In a desperate attempt to stabilize their markets, firms would come together to create a board of trustees would decide what the industry as a whole would do. Early trusts formed around sugar, tobacco, and oil industries. Because all of these firms came together and ultimately engaged in anti-competitive behaviors, these groupings of businesses were called trusts. A trust is any group of firms that tries to monopolize the market.
In the early 20th century, firms began to form these trusts to essentially control the market. Among other things—such as poor employment practices, dangerous working conditions, and child labor—all pushed the government towards new push for anti-trust legislation (we will discuss the other changes in a moment):