Legal Framework and Market Regulation

​Lesson 1: Legal Framework and Market Regulation

By Brian Feltus

​Unit 6: The Role of Government in the Economy

Limits of Markets

• The United States is a mixed economy

• So far, we have focused primarily on how markets operate

Limits of Markets

• In Unit 3 we looked at the roles and incentives of consumers and producers

• Unit 4 outlined how market forces such as supply and demand balance the interests of consumers and producers to set prices

• Unit 5 demonstrated the importance of competition in keeping prices low and promoting innovation

Limits of Markets

• As we discussed, relying purely on markets has several disadvantages:

  • Individual self-interest may result in instability

  • Can result in inequality

  • Markets do not provide public goods

• To address these problems, mixed economies allow for government intervention

Limits of Markets

• This unit we will be looking at some of the authority/power we give to the government over the economy

• Roles of government in the economy

  • Establishing and enforcing a legal framework for the economy

  • Regulating markets

  • Providing Pubic Goods

  • Redistributing wealth

Legal Framework

• Governments set laws creating a legal framework needed for markets to operate effectively

• At a bare minimum, governments must:

  • Protect private property rights

  • Enforce contracts

• Without these basic functions, markets could not exist

Legal Framework

• Laws function like the “rules of the game” that control relationships between businesses and individuals

  • individual interests often conflict

  • protections for businesses, individuals, the environment

• Just like in sports, these rules ideally promote the orderly functioning of society

Legal Framework

• Laws balance considerations for broad social goals of the economy:

  • Freedom

  • Efficiency

  • Equity

  • Growth

  • Security

  • Stability

Regulating Markets

• We often allow/expect the government to intervene in and regulate markets in the event of market failure

• Market Failure: when market forces such as supply and demand produce inefficient outcomes that hurt some or all market participants

Regulating Markets

• Ideally, individuals make choices that are good for society, not just for themselves

  • Remember the "invisible hand"

  • Working in mutual interest is the basis for trade (economic activity)

• Market failure occurs when individuals make decisions that are self-serving and negative for others

Regulating Markets

• For example, consider a factory that causes toxic pollution.

  • This may not bother the owners of the factory or customers in other cities/countries

  • It is harmful to other members of society because their lives and health are being impacted by decisions they are not a part of.

Regulating Markets

• Competition is the ideal regulating force in markets

  • However, it is imperfect

  • The profit motive of individual businesses works against competition

Regulating Markets

• Anticompetitive behavior limits competition

• Leading to oligopolies or even monopolies where very few businesses come to dominate an industry or the economy as a whole

• Without competitors businesses have little incentive to innovate, keep prices low, or pay workers fairly

Regulating Markets

• Government Intervention in markets

  • Lowering barriers to entry

    • Make it easier for new businesses to start up and compete

    • Reduce regulation

    • Subsidies/payments and tax breaks to incentivize business

  • Price controls

    • prevent businesses from overcharging consumers

Regulating Markets

• Government Intervention in markets

  • Antitrust laws: a set of laws that limit anticompetitive behavior in markets

    • restrict anticompetitive behaviors

    • Sherman Act (1890): made monopolies illegal

    • Clayton Act (1914): further restricted mergers that lessen competition and outlaws price discrimination

    • Federal Trade Commission Act (1914): This act established the Federal Trade Commission (FTC) and broadly prohibits unfair business practices

Regulating Markets