Chapter Summary

This chapter was Chapter 13 in the first through third editions of the book. It focuses on government activity in the market to correct market failures caused by market power, externalities, public goods, and incomplete information. The government's ability to regulate markets gives market participants an incentive to engage in rent-seeking activities, such as lobbying, to affect public policy. These activities may extend to international markets, where governments impose tariffs or quotas on foreign imports to increase the profits of special interests.

In the United States, the government influences markets through devices such as antitrust legislation, price regulation, insider-trading restrictions, and truth-in-advertising/truth-in-lending regulations, as well as policies designed to alleviate market failure due to externalities or public-goods problems. The rules that affect the decisions of future managers are spelled out in documents such as the Sherman Antitrust Act, the Clayton Act, the Robinson Patman Act, the Cellar-Kefauver Act, the Lanham Act, the Securities and Exchange Act, Regulation Z, and the Clean Air Act.

International markets and the effects of import restrictions are also covered in this chapter. We examine quotas, lump sum import tariffs, and excise tariffs. Some of these policies increase profits for both domestic and foreign firms, while some only increase profits of domestic firms while decreasing the profits of the foreign competitors.

Boxed examples showing the effects of government on the marketplace include: False Advertisements; and Motorcycle Tariffs. This concluding chapter takes the students through some of the rules in the U.S. that will affect pricing behavior of the firms, and shows how regulations can benefit or harm a specific firm in public goods settings and when international competition is present.