Question

The video for the week comes from a fellow who shared his life situation and how he turned "nothing into something" We can make the content that every entrepreneur essentially does the same. In a capitalist economy such as ours, we have new products come into the marketplace on a routine basis. That works for the consumer as they benefit from competing sellers which often results in high quality at a better price. The negatives are that it may give the consumer too many choices and as new things come into the marketplace. old items get ignored or pushed out all together.. When video recordings were coming about, the V\Beta company developed its Betamax machine. It was pretty much based on the Hollywood video camera recording machines with huge spools of tape on top to be looped through the machine to be played back. Sony decided that the format was too cumbersome and as a result, they created a product based on the audio cassette wherein the tape would be housed in a single unit that could be plugged into a machine for playback. The VHS system was enjoyed by the consumers more than the Beta system thus pushing Betanax out of the marketplace.

DISUSSION QUESTION:: As entrepreneurs create and bring new items/products to market, should there ever be a restriction on what is allowed to come to market other than regulated things such as air travel, prescription drugs. etc...Why? Why not? discuss in detail.

Answer 1

Conventional wisdom holds that high levels of government regulation drive down entrepreneurial activity by creating unnecessary barriers to market entry.  Theories that seek to explain the role of government regulation can help us understand the nature of the relationship between entry regulations and entrepreneurship. The two principle theories are the public interest theory and the public choice theory. Public interest theory is associated with Arthur Pigou (1932) and holds that government regulation is required to protect the public from market failures. This theory therefore implies that government should regulate new firms to ensure that they comply with minimum standards for providing goods and services. Such regulations reduce the direct harm to consumers from poor-quality products and the indirect harm to the public from negative externalities such as pollution. The public choice theory, on the other hand, points out that the government is not benevolent and regulation may in fact lead to inefficient outcomes. There are two arguments typically forwarded to support public choice theory. The first emphasizes that regulations serve to benefit politicians and government bureaucrats. Since nascent firms are the source of Schumpeterian forces of creative destruction that are essential for economic dynamism, higher bureaucratic barriers to entry reduce productivity growth of existing firms because the disciplinary effects of competition are inhibited. Stricter regulation of entry is associated with greater inefficiency of public institutions, such as more corruption and a larger unofficial economy. They find no evidence linking stricter regulation with superior product quality, increased market competition, or remedies for market failures. Stricter regulation of entry is associated with greater inefficiency of public institutions, which results in negative outcomes (less entrepreneurial activity in this case). It is, however, important to point out the findings by Dreher and Gassebner (2013), which suggest that, in highly regulated economies, corruption reduces the negative effect of regulations on entrepreneurship. The reason is that firms pay bribes to officials in order to circumvent regulations, which in fact means that corruption actually greases the wheels of entrepreneurship in these economies.

1. Some types of regulation support entrepreneurial activity. A greater number of entry procedures, or costs associated with incorporating a company, were correlated with increased levels of company formation up to a certain level. Similar results were found for costs and procedures related to contract enforcement. However, after a certain point, increasing these types of regulation results in decreased entrepreneurial activity. This suggests that there is an optimal level for these types of national business regulation.
2. Other types of regulation are harmful for budding entrepreneurs. Increased taxes and property registration requirements led to a decrease in rates of company formation over time, in line with conventional thinking on regulation and entrepreneurship. Unlike entry procedures, high entry costs were also associated with fewer companies founded over time.
3. The complexity of regulation is a greater obstacle than its costs or fees. An increase in the number of procedures needed to comply with regulations had a stronger negative impact on entrepreneurship than increasing the cost of regulation, i.e. increasing regulatory fees.
4. National business regulations and local conditions matter. Local conditions including a city’s industry mix, transportation infrastructure, and rates of employment in service sectors had a positive effect on the number of firms formed per city. However, the majority of variation in entrepreneurial activity per city was explained by national-level regulations. This suggests that policymakers should consider national-level policy when formulating strategies to increase entrepreneurship, which often aim to effect change exclusively at the city level.

Policymakers have an important role to play in creating an optimal environment for successful entrepreneurs. To stimulate entrepreneurship, regulators should aim to identify and implement the optimal level of market entry procedures, contract enforcement procedures, and contract enforcement costs for their specific national context, while minimizing taxes, property registration, and entry costs.

Entrepreneurship is also significantly harmed by a lack of high-quality institutions. Two measures of institutional quality have a statistically significant, positive impact on entrepreneurial activity: regulation quality and voice and accountability. A third measure of institutional quality, political stability, is positive and statistically significant in both the cross-section and the preferred panel model. The remaining measures of institutional quality promote entrepreneurship in some models but not others, while three measures are universally statistically insignificant: the control of corruption, government effectiveness, and the rule of law. The policy implications are clear: If a nation wishes to promote higher levels of domestic entrepreneurship in both the short and long run, top priority should be given to reducing barriers to entry for new firms and to improving overall institutional quality (especially political stability, regulatory quality, and voice and accountability).