Regulation by Government on Business
Every society has complete rights to understand and make proper use of the capital, environmental and natural resources, available labor for production of services and goods. Both consumption and production must be organized in a way which can help in avoiding inefficient consumption of services and goods and also inefficient use of resources can be avoided in order to get best from the scarce resource available. When the produced services and goods are consumed without any wastage then it can be considered as social economic efficiency exists in the system. In order to maintain the proposed idea, government must fulfill two major efficiency conditions (1) allocation efficiency and (2) productive efficiency.
Under ideal situations a completely competitive market reaches equilibrium which is both allocatively efficient and also productively efficient. However, market conditions are not always the same and in that condition perfect competitive markets fails to bring the economic efficiency in the society. The reasons behind the failures of competitive market will be discussed further.
As discussed above in order to avoid wastage government must focus on two efficiency condition that can results in higher profit with limited resource available. Product efficiency must be operated in market so that the society gets best from the scarce resources. Product efficiency can be considered true when producers and suppliers produce the services and goods at the lowest cost to the society. In any case, if markets failed the achieve the product efficiency the resources will go in vain and will ultimately affect the amounts of goods and services that can be produced or supplied in any other industry. When growth of an organization is targeted leaders choose the path by which lowest possible cost can be incurred. Thus it can be concluded that productive efficiency appears when managers and leaders operate along their organization's expansion plans in both long run and short run periods.
The second condition, allocation efficiency is required for social economic efficiency which requires firms to supply optimal amount of services and goods which are demanded by the society and therefore these supplies must be rationed to the people who place the topmost value on consuming the units. Since the productive resources are very scarce, it must be allocated to different industries in appropriate amount in order to maintain the production. When marginal benefit of any unit to consumers equals the marginal cost to society for producing any unit the optimal level of output is achieved. The price attached with the market demand allows the marginal benefit buyers place on consuming the further goods. Therefore allocation efficiency requires the production of goods and services up to the mark where the highest price consumers are ready to pay for the last unit produced equals its marginal cost of production.
In any case if government is not able to handle both the conditions properly it will directly harm the organizations i.e. the producers and ultimately the buyers i.e. the consumers. If resources are wasted like this in future and the extra production and allocation is not stopped then individuals at all levels local, state and national will suffer from the scarcity of certain resources and the future generation will never be aware of existence of any such resource.
Basically social economic efficiency occurs when two conditions are met firstly, industry output must be produced at the cost which is lowest in all possible manners and secondly, the socially optimal amount of services and goods are produced by every industry and are distributed to the society who consider them the most valuable. Competitive markets can do wonders for the society, under perfect competition; the producers produce the correct amount of services and goods, apply the correct price and right consumers receive the correct amount of services and goods. However, not all the markets are competitive enough and even competitive markets can fail to reach highest social surplus. Market failure generally results when market fails to achieve social economic efficiency and fails to maximize social surplus. The forms of market failure can be result of allocation or production efficiency which includes negative or positive externalities, public goods, common property resources, information issues, natural monopoly and market power. As competitive equilibrium works to highest social surplus, any government intervention which keeps the market away from competitive stability will reduce the social surplus. However, when a market failure creates inefficiency then at least government interventions can improve the performance of the market. Thus to overcome the market failure, the motivation by government intervention can increase the social surplus in public interest for the policy makers in order to justify government regulations.