Long-Term Investment Decisions
Stephanie Piris
ECO 550
Dr. Gerace
Assignment 4
December 20, 2012
Long-term Investment Decisions
1. Explain why government regulation is or is not needed, citing the major reasons for government involvement in a market economy. Provide support for your explanation. In a free market economy, buyers and sellers freely trade with each other according to their own self-interest and the laws of supply and demand. Competitive market forces efficiently allocate resources. The role of government is limited to controlling the law and order of a country, but most people agree that society needs some form of government regulation and public policy in order to balance public and private interests and promote economic growth. One major reason for government involvement in a market economy is externalities. Externalities come about when economic activity has an unintended effect on a third party that is not directly involved in a transaction (Jack Welsh Management Institute, 2012). Externalities can be negative or positive to society. Examples of negative externalities are damage to the ecosystem, loss to the tourism industry, etc. The fundamental problem with a negative externality is how to measure the full social cost associated with economic activity. A positive externality happens when the production or consumption of a good or service benefits a third party who did not pay for that benefit. Education, for example, benefits society as much as it benefits the individual. Educated people tend to spur higher productivity for companies, create new inventions, and generate taxes from salaries.
2. Justify the rationale for the intervention of government in the market process in the U.S. The use of private goods and public goods would be the rationale for the U.S. government to intervene in the market process. Private goods are exclusionary and limited in the sense that when you use them, other people cannot. An example would be food and clothing. And because
ECO 550
Dr. Gerace
Assignment 4
December 20, 2012
Long-term Investment Decisions
1. Explain why government regulation is or is not needed, citing the major reasons for government involvement in a market economy. Provide support for your explanation. In a free market economy, buyers and sellers freely trade with each other according to their own self-interest and the laws of supply and demand. Competitive market forces efficiently allocate resources. The role of government is limited to controlling the law and order of a country, but most people agree that society needs some form of government regulation and public policy in order to balance public and private interests and promote economic growth. One major reason for government involvement in a market economy is externalities. Externalities come about when economic activity has an unintended effect on a third party that is not directly involved in a transaction (Jack Welsh Management Institute, 2012). Externalities can be negative or positive to society. Examples of negative externalities are damage to the ecosystem, loss to the tourism industry, etc. The fundamental problem with a negative externality is how to measure the full social cost associated with economic activity. A positive externality happens when the production or consumption of a good or service benefits a third party who did not pay for that benefit. Education, for example, benefits society as much as it benefits the individual. Educated people tend to spur higher productivity for companies, create new inventions, and generate taxes from salaries.
2. Justify the rationale for the intervention of government in the market process in the U.S. The use of private goods and public goods would be the rationale for the U.S. government to intervene in the market process. Private goods are exclusionary and limited in the sense that when you use them, other people cannot. An example would be food and clothing. And because
References: Hammer, Peter J. and Sage, William M. (2003). Critical Issues in Hospital Antitrust Law. Health Affairs: http://content.healthaffairs.org/content/22/6/88.full Jack Welsh Management Institute (2012). Managerial Economics: Government in the Market Economy. Retrieved at http://www.jwmi.com/content/managerial-economics-governament-market-economy. Ludwig, M., Van Merode, F., and Groot, W. (2010). Principal agent relationships and the efficiency of hospitals. The European Journal of Health Economics. http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2860099/ Spang, Heather R., Bazzoli, Gloria J. and Arnould, Richard J. (2001). Hospital Mergers And Savings For Consumers: Exploring New Evidence. Health Affairs: http://content.healthaffairs.org/content/20/4/150.full