In addition to fiscal and monetary policies, a government affects the economy
through regulatory policy, which aims to limit what can be done in the
marketplace. Most governments have some regulations covering a variety of areas,
including:
- Banking, insurance, and other financial businesses
- Safety
- Environmental impact
- Minimum wages
Example: In the United States, several
government agencies and independent organizations regulate the market. The
Federal Reserve Bank, for example, has some power over regulatory policy because
the Fed tells banks how much actual cash must be kept in each bank (this is
called the reserve rate). The Occupational Health and Safety Administration
regulates workplace conditions to prevent injury. And the Environmental
Protection Agency imposes limits on toxic emissions.
Overregulation and Deregulation
Sometimes the government does not do a good job of regulating. An excess
of regulation leads to overregulation. Over- regulation can hurt
businesses and creates inefficiencies. Governments usually overregulate out of a
desire to increase equity or promote social justice.
A lack of regulation leads to deregulation, or a push to
repeal or reduce regulations. Deregulation usually occurs in the name of
boosting economic efficiency. Although it can increase competition, deregulation
can sometimes lead to chaos and hurt consumers.
Example: The commercial airline
industry in the United States was deregulated in the 1970s and 1980s. In
general, this deregulation resulted in lower prices and more choices for
consumers. But many airlines now perpetually hover on the brink of
bankruptcy.
Codetermination
Codetermination is a policy used in some states with strong
social democratic parties. Derived in Germany after World War II,
codetermination forces large corporations to have substantial representation
from the workers on the board of directors. Because workers have direct input
into corporate policy, the relationship between workers and management often
improves. There have been few labor strikes in Germany as a result.
