Question

How do government regulations affect markets? Provide an example and assess its impact on strategy within a given industry.

Answer 1

The government plays a key role in affecting the whole economy. It has control over the fiscal and monetary policies that can make wide changes in the economy. It can increase the supply of money and thus increase the investments by lowering the interest rates. Increase in investments helps businesses and firms to expand. It can also put a tariff on imported goods in order to support domestic industries and producers. It gives various subsidies to industries so that they get a boost in their level of production. The government also regulated the market by imposing an environmental tax on industries that release a lot of waste into the environment that harms the citizens of the country.

For example, there is a chemical industry that releases a lot of waste in the surroundings in the form of air pollution, water pollution, and land pollution. The government decides to impose a per unit tax on them for every unit of waste disposed of by them or a lumpsum tax on them for polluting the environment (or releasing waste) above a decided limit. In both cases, the industry will find it profitable to reduce its production level so that it does not have to pay taxes to the government. The loss borne by it for reducing its production is less than the tax it has to pay for extra waste released in the market. In this way, government regulation can affect the strategy of production within an industry,