Why Does the Government Regulate Businesses?

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Purpose

Government regulates business for several reasons. First is public safety and welfare. Many industries are regularly reviewed and overseen because their activities, if they go awry, can have significantly harmful effects to human health, financial well-being, or community structure.

The second reason is protection of industry. Many regulations are in place to protect those who have developed their business correctly; licensing, permits, and inspections by the government weed out undesirables or criminal activities that undercut honest industries.

The third reason is revenue generation. Many programs require certification or licensing that businesses must pay for in order to operate. The funds collected go to pay for the government programs that perform the oversight of the particular industry. However, in many cases, some portion of revenue is also sidetracked to general government purposes and is, effectively, a tax.

20th Century Development

Regulation of business in the 20th century has developed at multiple government levels through the form of commissions. Government departments and agencies are still heavily involved. However, commissions are seen as more responsive, and board members can, in many cases, be from private industry, providing a receptive face to business interests in government. Doing so also provided the government with decisions-makers who intimately understood business issues and how they may conflict with new regulations or changes. This approach also allows for a much cheaper resolution of legal conflicts than taking regulation challenges to the court system through a formal lawsuit.

Deregulation Attempts and Results

Experiments in government in getting out of the business of regulation, i.e. deregulation, have been mixed. In fact, up until the 1970s government was working in the opposite direction with the creation of new agencies at the federal level, such as the Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency (EPA).

Large-scale deregulation began in the 1980s with the removal of oversight on the airline industry and that of the telecommunications, railroad and trucking industries. Those have generally been successful and still operate, deregulated, today.

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Less Impressive Results in Practice

On the other hand, financial deregulation has created bigger problems in business. The loosening of oversight on the savings and loan industry resulted in failure of banks, and left taxpayers to foot the bill for lost account values. In the 2000s, the deregulation of the electricity industry allowed for large-scale gaming of rates for profit-making. The results collapsed entire markets and created social panic of skyrocketing electricity prices based on market floats.

The credit crisis crash of 2008 has again signaled a need for more regulation in business, particularly the finance industry. The fact that a small number of bank units and finance houses could game the real estate and financial investment systems has angered many, enough so that they're calling for new restrictions on such activities.

Conclusion

U.S. governments at all levels rely on business as much for the viability of the country as for the financial support provided. Much of government's tax revenue comes from industries every day. That said, to a business owner or manager the multiple levels of governmental oversight can seem confusing and/or unnecessary. However, this difference of perspective is frequently balanced through hybrids in the form of commissions and boards over a particular industry activity, allowing for both regulation and the relatively free flow of commerce.

About the Author

Since 2009 Tom Lutzenberger has written for various websites, covering topics ranging from finance to automotive history. Lutzenberger works in public finance and policy and consults on a variety of analytical services. His education includes a Bachelor of Arts in English and political science from Saint Mary's College and a Master of Business Administration in finance and marketing from California State University, Sacramento.

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