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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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Government regulations


In addition to business taxes levied by all levels of government, there are a plethora of government regulations affecting businesses that are essentially designed to protect against 'market failures' inherent in market capitalist economies.  Laws or regulations relating to licensing, permits, OH&S, work safety, etc) all work to protect some members of society from the costs that businesses typically 'externalise' to third parties (see externalities).  When governments introduce new regulations they invariably result in compliance and other costs for businesses that raise the costs of production.  Provided that the regulations are appropriately targeted and applied (i.e. they rectify the market failure), then the net benefits for society should increase and living standards should improve on average.  


Regulations often involve a balance between improving non-material living standards at the expense of material living standards.  For example, regulations requiring builders to erect scaffolding around new structures when working at elevated heights will add dollars to the cost of any project. These added costs are passed onto the consumer and the total price of a renovation or new construction increases.  This decreases any construction activity, reduces growth, incomes, employment, etc.  However, it does save lives and reduces the risk of injury - benefits which are largely 'non-material'.  


Similarly, the implementation of a carbon tax (or other means of pricing carbon) adds to production costs, increasing prices and inflation and having negative effects on economic growth, unemployment, external stability and equity in the distribution of income.


An argument can therefore be mounted that government regulations add to production costs, leading to detrimental effects on all economic goals for the same reasons as those outlined for a reduction in productivity.  


Other regulations, such as those relating to directors duties, the formation of companies, etc. (via the Corporations Law), or mergers and acquisitions, misleading and deceptive conduct (via the Australian Competition and Consumer Act) are designed to improve the operation of our markets by improving the transparency, safety and efficiency of our markets.  These types of regulations, if appropriately applied, facilitate greater economic activity over all, despite the added production costs.  


In light of recent financial crises and the relative lack of controls placed on financial institutions (including Australia's), global economies have entered a period where the governments are re-regulating parts of their financial systems to ensure they are stable and less prone to the problems experienced over recent years.    


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