Solution for Business and Professional Ethics 7th Edition Chapter 8, Problem 1

by Leonard J. Brooks, Paul Dunn
592 Solutions 9 Chapters 60560 Studied ISBN: 9781285182223 Ethics 5 (1)

Chapter 8, Problem 1 : 1.How could increased regulation improve the exercise of...

1.How could increased regulation improve the exercise of unbridled self-interest in decision making?

Step-By-Step Solution

1.Market failures often occur when there is an inefficient allocation of costs and benefits.  Externalities are costs or benefits that are borne by third parties, i.e., parties who are not part of the initial contract.  An example is air pollution that is a cost that is borne by society.  The marketplace is unable to control pollution and so government regulation is required.  The collapse of the subprime mortgage market and the associated collapse of the mortgage-backed securities market are also examples of market failures.  Increased government regulation may have helped to prevent or minimize the negative aspects of these market failures.  For example, Canadian banking regulations prevent Canadian chartered banks from being over-leveraged; the American banks had no similar legislative constraints.  Many American banks failed as a result of the crisis, but no Canadian banks failed.  Although many managers do not like to have their managerial discretion constrained through government regulation, legislation can be useful when people forget their responsibilities to the rest of society, or when the opportunity for unrealistic gain is too great.

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