Business

Environment
B.N. Ghosh

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Chapter 12
Role of Government

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Learning Objectives
The role of government in the development of
business environment
Government measures to tackle market-failure
problem
Government regulations and controls
The theory of regulation and regulatory failures

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Role of government in
development of business
environment
An underdeveloped
or developing country cannot

attain prosperity unless the state intervenes or takes an

initiative.
The state has to play an important role in social
development as well as industrial growth.
The main obstacles in the way of economic progress
of least developed countries (LDCs) are the lack of basic
amenities such as power communication,
transportation, irrigation facilities, education, and
research.
To achieve economic prosperity, the provision of
economic and social overhead capital is essential.
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Role of government in
development of business
environment

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Role of government in
development of business
environment
The state must provide
the following facilities to attain
economic and industrial development.
Become Self-sufficient
Reduce Cost of Production
Provide for Shortage of Capital and Manage the
Workforce
Invest in Human Capital and Promote
Education
Support Agriculture
Check Disparity in Wealth and Income
Adopt Suitable Monetary and Fiscal Measures
Proper Allocation and Stabilization
EfficiencyEquity Trade-of
Merit Goods
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Role of government in
development of business
environment

Infrastructure and Institutional Development

Minimizing Insecurity in Doing Business
Bureaucratic Delays
Import- and Export-related Aid

Protection to Business and Making It More

Competitive and Contestable
Upgradation of Technology and Focus on
Innovation
Structural Factors to be Made Pro-business
Creation of New Value System in Business
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Provide for shortage of capital

and manage the workforce
For the purpose of macroeconomic development, and
to eradicate unemployment, the state should adopt
simultaneously labour- and capital-intensive
techniques.

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Invest in Human Capital and

Promote Education

Investment in human capital is highly productive in

underdeveloped countries.

An underdeveloped country requires technicians,

doctors, teachers, engineers, and the like, who will
contribute positively towards increasing the flow of
goods and services, thereby accelerating the tempo
of industrial development.

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Adopt suitable monetary and

fiscal measures
In the initial stage of economic growth, an
underdeveloped country should create economic
surplus from the agricultural sector. At the same
time, the institutions should be developed to draw a
substantial part of the wealth of agriculture to
prevent it from being used up in unproductive
consumption.

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Minimizing insecurity doing

business
Terrorism and insurgency are big obstacles in the
Indian business environment.
The government needs to make the lives of business
people safe in India. It is also the situation in many
other developing countries including Pakistan, Iraq,
Afghanistan, Syria, and so on.

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Protection to business and

making it more competitive
and
contestable
A full-fledged competitive environment stands for

zero level of wastages and maximum possible level of

output, employment, and income.

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Government measures to
tackle market-failure problem
Market failure occurs when the economy cannot
function on the basis of the rules of market as dictated
by price mechanism or demandsupply construct. In
the case of market failure, the following measures can
be adopted by the government.
Imposition of a Corrective Pigovian Tax
Government Regulation
Market for Pollution Rights
Internalization of Externalities
Creating Property Rights

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Government regulation and

control
The following are the basic objectives of regulations:
Bring to limelight any hidden unethical issue or issues
regarding which the public is not aware. It is resorted
to in order to make the public aware.
Prevent market failure (i.e., to regulate the market in
such a way that the market efficiently operates).
Overcome the problems that are responsible for the
market failure.
Ensure social welfare and public interest along with
business development.

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The theory of regulation

A policy of competition will be desirable for the
business sector in the following cases.
Regulation of Monopoly Power
Price and Output
Profit
Industries with Externalities
Product Quality
Social Inequalities
Asymmetric Information
Banking and Finance
Capitalist Regulation
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Profit
Profit may have to be regulated through a number of
ways such as regulation of markup and fixed rate of
return on investment based on the average rate
obtained in the industrial sector in comparison with the
international standard.

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Asymmetric Information
Rational ignorance is a situation where the cost of
information is much higher than the apparent benefit
from the deal, so people try to remain ignorant .

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Regulatory failures
The first source of regulatory failure is the conflicting
goals of regulations. Some of these conflicting
objective are:
Conflicting Goals of Regulations
Problems of Regulations
Over-regulation

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Problems of regulation
The capture theory of
regulation
Although ministers (legislators) are the agents of
the people (principal) and should always try to further
peoples interests, they in reality cannot and do not
always do that.
Personal interest may clash with national interest,
and in many cases, the former gets precedence over
the latter .

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