CHAPTER E1. THE ROLE OF THE GOVERNMENT

Topics covered in this chapter:

1. the significance of the type of economic system

2. legitimate roles for the state

3. the mission of the not-for-profit organization

4. the applicability of managerial decision criteria in the not-for-profit sector

5. the implications of the budget constraint

6. managerial performance incentives and linkage in the not-for-profit sector

7. problems of bureaucracy

8. benefit-cost analysis and marginal decision criteria

9. the problem of subjectivity in analysis

10. points of contact between the firm and the government

11. threats and opportunities in the involvement of government in the economy

12. rationales for governmental involvement in the economy

13. managerial implications of relationships with government

CHAPTER E1. THE ROLE OF THE GOVERNMENT

We have made numerous allusions in previous chapters to the interrelations beween the firm and the government. Our purpose in this chapter is to delve into these relationships, but our task is made all the more interesting and challenging by the recent events transpiring in Eastern Europe, the former Soviet Union, China, and other parts of the world where socialism has been the predominant form of economic organization for a half century or more.

Forms of Economic Systems

The nature of the relationship between the microeconomic productive unit (i.e., the "firm" in our previous discussions) and the state depends critically upon the form of economic system in place in the society. Although it is possible to identify a wide range of economic system types (including communalism, tribalism, feudalism, and traditionalism), we shall limit consideration to the three which seem to be most pertinent to circumstances of the modern world: socialism, capitalism, and fascism.

In the extreme form of authoritarian socialism, the microeconomic productive unit may be little more than an appendage of the state. Indeed, there is little point in making distinctions among micromanagement (i.e., the management of the productive unit), industrial organization and policy, and the macromanagement (i.e., the implementation of macropolicy) of the entire economy. They are all tied up together. For all intents and purposes, there is virtually no freedom of enterprise in authoritarian socialism.

Efforts at centralized and authoritarian direction of the economy seem to have revealed inefficiencies almost everywhere they have been tried. However, societies employing such forms of economic organization seem to be backing away from them in favor of capitalism. Capitalism is distinguished by private ownership of productive resources which are organized by markets. Rather than being highly centralized, decision making in capitalism is widely dispersed to the managements of a myriad of microeconomic productive units, i.e., individuals and the firms or enterprises which compose the economy.

In most forms of capitalism there is a cleavage between the microeconomic productive units and the state which functions as government. In the purest form of capitalism, the state owns no productive resources and engages in no productive activity. Its role is closely circumscribed to providing a legal and social environment which is hospitable to the functioning of the private economy. By the same token, the privately-owned productive units have have no significant governing responsibility or authority, but they enjoy a maximum of freedom of enterprise. It is these entities which have been the focus of managerial economic analysis thus-far in this text.

Between the extremes of authoritarian socialism and pure capitalism is possible a wide range of governmental productive activity as well as the use of market mechanisms in conjuction with central planning. The terms "mixed capitalism" and "mixed socialism" are used to described these intermediate forms of economic organization. The exercise of decision-making authority by the managers of enterprises depends critically upon the nature of the relationship between their organizations and the government.

Fascism is a curious combination of the character-istics of socialism and capitalism. Resources remain privately owned as in capitalism, but the state (often in the form of a dictatorship) exercises centralized authority to impose production quotas to be met by the privately-owned enterprises. In fascism, freedom of enterprise is severly restricted. Although fascism has an infamous twentieth-century history, the most prominent examples of it have been eliminated from the world scene. But there almost certainly are examples of functional fascism in today's "third world." And some Western societies are experimenting with a softer variant, statism, which involves increasing willingness to rely upon the powers of the state to treat social, political, and economic problems.

The Applicability of Managerial Decision Criteria

The managerial economic principles and decision criteria elaborated in earlier chapters have been postulated for the context of privately-owned, profit-motivated business enterprises operating within market capitalism. It is not clear that these principles and criteria are also applicable to microeconomic production units in a centrally planned and directed economy. Nor is it clear that they can apply to governmental departments and their subdivisions and agencies, or to organizations in the not-for-profit sector of a market economy (churches, charitable organizations, educational institutions, health-care organizations, etc.). These are similar in that while each is oriented toward pursuit of some mission, that mission is not to realize the maximum possible amount of net income. It therefore appears that decision criteria which are postulated for profit-oriented firms may not be applicable to not-for-profit organizations.

One problem is that in both the government agency and the not-for-profit sector, the financial requirement is simply to remain within budget (i.e., a budgetary non-negativity constraint), rather than to maximize profit (net revenue). A similar constraint usually is imposed upon a factory in a centrally-planned economy. However, this is not unlike satisficing, i.e., the pursuit of a target return on invested capital, in the for-profit sector of a market economy as originally hypothesized by Herbert Simon (discussed in Chapter A4). In the government agency and the not-for-profit organization, the target return is simply zero rather than some positive net amount. If for-profit business firm managers can target some (any) positive amount of net income (rather than try to realize the maximum possible), it should be feasible for the managers of not-for-profit organizations to employ the same decision criteria in pursuit of a zero or non-negative return. Zero should be as good a target as some positive amount.

In Chapter A4 we examined the thesis that managers of some for-profit business firms may attempt to optimize rather than maximize with respect to profit. Optimization (elaborated in Chapter B2) means maximization of a primary goal subject to one or more constraints which are imposed by the existence of subsidiary goals. William Baumol hypothesized that many managers, instead of attempting to achieve the maximum possible profit, actually pursue some non-profit goal, e.g., sales volume or share of market, subject to a minimum acceptable profit constraint (e.g., a target return on invested capital). The Baumol model is elaborated in Chapter D6.

In the not-for-profit sector, the organization always has some mission to accomplish or some goal to pursue. Often the mission or goal can be expressed in some quantifiable but non-pecuniary form. For example, in a charitable organization such as the Salvation Army, the mission may be to provide the most welfare services (meals, shelter, etc.) to constituents while not overexpending the budget. The manager of a (former) Soviet factory may be required to meet an output quota imposed by the contral plan while remaining within the factory's budget. These are fairly straight-forward applications of the Baumol thesis taking the minimum acceptable amount of profit as zero (i.e., no loss or negative profit).

Production units in centrally planned economies and not-for-profit organizations in market economies are notorious for inefficient operation in the sense that costs tend to be excessive and goal achievement seems to be deficient in comparison to comparable for-profit enterprises. A significant problem in these situations is that it is very difficult to provide the manager with performance incentives. It is also difficult to link the process of mission pursuit to any factor which constitutes a performance incentive for the manager. This linkage often is achieved in the for-profit sector of the market economy by letting the manager share in the net income of the enterprise (bonuses, stock options). But this is a problem of linkage, not a problem of the applicability of managerial decision criteria.

A final problem which we shall note is that of organizational bureaucracy. Typically there are several levels of management in any complex organiza-tion. The managerial decision criteria which we have described in earlier chapters are most appropriately employed at the highest level of managerial policy making where the managers can take a view which oversees the whole enterprise. These principles may be of lesser applicability at any intermediate level with-in the bureaucracy where the department or division-level manager (bureaucrat) can see and exercise control over only the few variables associated with the department. But bureaucracy is no less a problem for the corporation in the for-profit sector than for a charitable organization in the not-for-profit sector or the factory in a centrally planned economy.

The conclusion to which we have been moving is that the managerial decision criteria elaborated in earlier chapters should be applicable to decision making in not-for-profit organizations and government agencies, but there are other problems of performance-incentive linkage and bureaucracy which must be dealt with.

Benefit-Cost Analysis

If the principal objective of a not-for-profit organization is to maximize some aspect of its non-pecuniary mission, the marginal comparison criteria applied in the for-profit sector to revenues and costs should be equally applicable in the not-for-profit sector to the quantifiable characteristics of the mission being pursued. "Benefit-cost" analysis may provide decision criteria for the organization manager in the government and not-for-profit sectors. The sum of all benefits (non-pecuniary as well as revenue) resulting from mission pursuit constitutes the numerator, B, of the benefit-cost ratio. Its denominator, C, consists of the sum of all costs (non-pecuniary as well as pecuniary) incurred in pursuing the mission. If the value of the ratio is a number greater than unity (i.e., B/C > 1), then the activity under analysis is justifiable; any benefit-cost ratio less than unity (i.e., B/C < 1) suggests that the activity is unwarranted.

Simple benefit-cost analysis has been extended to the concept of marginal benefit-cost analysis. This version is applicable to situations where the question is whether to do more or less of the activity which is already in progress. The numerator of the marginal benefit-cost ratio includes only the additional benefits which are expected to flow from some increment of the activity; the denominator sums only the increased costs incurred by the activity increment. The same decision criterion holds for the marginal as for the simple benefit-cost ratio: a value greater than unity warrants the activity increment while a value less than unity indicates that the activity increment should not be undertaken. While marginal benefit-cost analysis has been used most often as a decision criterion in the not-for-profit sector, it is apparent that the for-profit criteria of marginal revenue and marginal costs are special cases of marginal benefits and costs where the benefits and costs are pecuniary values (or equivalents).

Both simple and marginal benefit-cost analyses are subject to bias and fraught with the potential for abuse. The bias follows from the requirement to include all benefits (psychic and other non-pecuniary benefits as well as any revenues resulting from the activity) and all relevant costs (non-pecuniary psychic and opportunity costs as well as explicit money costs). The problem is that a decision maker who is has a predisposition favoring a proposed activity tends to exhaustively identify all possible benefits and also tends to overestimate their money value equivalents. A decision maker with such a predisposition also tends to be more casual about identifying the relevant costs, and may also be inclined to underestimate their money value equivalents. By the same token, a decision maker with a predisposition against an activity tends to do the opposite, i.e., to casually overlook some benefits and underestimate the values of those identified, while exhaustively finding all relevant costs and carefully estimating their full money-value equivalents. Because of the subjectivity involved, it is entirely possible for two decision makers, confronted by precisely the same prospects and with the same information, to estimate widely divergent benefit-cost ratios and reach opposite decisions about whether to proceed with the activity.

Points of Contact between the Firm and the Government

Because capitalism (or market economy) is the form of economic organization to which the world seems to be drawn, we shall presume its general characteristics in subsequent discussion of the role of government. Given this presumption, there are six principal points of contact between firms and the government.

(1) Along with other entities in the economy, the government is a demander of goods and services from private-sector business firms; i.e., firms function as suppliers to the government. Since the government is likely to be the single largest economic entity in any economy, the prospect of supplying the government should provide market opportunities for a great many firms in the economy. However, firms seeking to function as suppliers to government should beware of becoming too highly dependent upon government orders.

(2) Firms pay taxes to the government. The taxes may be related to the firms' profits, their sales, their inventories or other assets, or the wages which they pay to their employees. Tax-related record keeping and reporting often become burdensome to business firms, and tax liabilities and rates are subject to change at the dictatorial or parliamentary whims of the state.

(3) Depending upon the government's particular political, social, and military programs, various firms in the economy may become objects of support by the government. Such support may take the forms of subsidies, approval of licenses, preferential contracts, or other encouragements. The government may attempt to structure such activity as a coherent industrial policy for the promotion of international competitiveness of domestic companies.

(4) In pursuit of its agenda, government's interests in firms may extend beyond support to efforts to control the activities of firms. Objects of governmental controls may include directions of research and development efforts, determination of product mixes and item specifications, selection of capital investment alternatives, eligibilities for import or export licences, and employment practices. These activities may become elements in a more comprehensive industrial policy.

(5) The private sector may become an object of regulation by the government in the interest of employees, consumers, or other interests in the economy. Such regulation almost always imposes additional costs upon business firms, and consequently squeezes profits or results in higher market prices.

(6) And finally, the private sector may become the object of efforts either to promote and encourage competition, or to stifle or prevent competition. In the former case, "antitrust" or "antimonopolies" laws may be enacted and enforced; in the latter case the government may become the prime mover in the effort to "rationalize" or cartellize industry (also a possible component of industrial policy).

In their extreme manifestations, points (1) and (4) above may devolve to the characteristics of fascism. We may also note that the government can effect a ready transformation to the characteristics of socialism simply by nationalizing private-sector firms so that they become government-owned and directed enterprises. Our purpose in making these observations and otherwise identifying the various points of contact between firms and the government is to note that the operation of government in a capitalistic economy may pose threats to private sector firms as well as provide opportunities which they may attempt to exploit.

Rationales for Governmental Involvement in the Market Economy

The most fundamental role for government to play in the market economy is the maintenance of an environment which is hospitable to the functioning of market economy and the exercise of entrepreneurship. At very minimum this means establishing the rules for holding, transferring, and arbitrating disputes over the possession of private property, determining weights and measures, providing a stable money supply, insuring the sanctity of contracts, and otherwise maintaining law and order. John Stuart Mill during the nineteenth century referred to these minimal roles for government as the "night-watchman" functions.

Beyond the night-watchman functions are four other significant rationales for governmental involvement in the market economy: to maintain competition, to reallocate resources, to redistribute incomes, and to stabilize the economy. Each of these rationales is founded upon some fault, shortcoming, or failure in the functioning of the market.

From this perspective it may be noted that any problem in the functioning of a market may invite some response from government to address the perceived problem. And if market mechanisms exhibit traumatic failure or become fundamentally distrusted by the political leadership of the society, these constitute the rationales for shifting to fascism by conferring product-mix decision making upon a central authority, or to socialism by nationalizing privately-owned productive resources and imposing central planning and direction. By the same token, failure of authoritarian socialism constitutes the rationale for shifting from authoritarian control to some form of market economy. It appears that this latter phenomenon is being widely experienced in the Eastern Europe even as some economies of the West experiment with more statist orientations.

The Maintenance of Competitive Conditions

Viable competition among business firms in each market is the sine qua non of market capitalism. It is competition which ensures that firms efficiently produce only those goods and services demanded by the consumers of the society. But there is an inherent divergence of interest between the firms in an industry and their customers. Although customers surely benefit from adequate competition (lower prices, higher quality merchandise, greater product variety), firms might achieve greater profits in cooperation with each other or as sole monopolists of their respective markets.

Firm managements find incentive to attempt to achieve monopoly by internal growth, acquisition of competitors, or engaging in practices to destroy the abilities of competitors to effectively compete. If the achievement of monopoly is blocked by public policy (e.g., antitrust law and its effective enforcement), they may attempt to cartellize the industry. If cartellization is prevented, firms may attempt to collude with competitors to set prices or allocate sources of materials or markets. If all of these avenues are blocked, the firms in an industry may engage in price leadership-followership behavior. Each of these behavior patterns is discussed in Chapter 11.

Governments of democratic societies then find rationale to undertake the promotion and preservation of competitive conditions in their economies. This is usually done by enacting legislation which declares the existence of monopoly to be unlawful (in the U.S. this is accomplished by Section 1 of the Sherman Antitrust Act) and the perpetrator of monopoly to be guilty of an unlawful act (Sherman, Section 2), or which enumerates specific acts or activities which diminish competition and which are thus unlawful (the Clayton, Robinson-Patman, and Wheeler-Lea acts). But the enactment of legislation alone is not enough. The government must further establish an enforcemnt authority (in the U.S., the Federal Trade Commission and the Antitrust Division of the Department of Justice) and resolve to make effective the enforcement of the relevant legislation. This resolve may differ significantly according to the political party in office and the particular agenda which it is attempting to implement.

The managerial implications of the determined enforcement of laws which are intended to preserve and maintain competition are that managers of business firms must make themselves knowledgeable of the pertinent laws, and they must make calculated judge-ments as to whether to risk violating such laws in any of their sourcing, producing, or marketing activities. It may also be worthwhile to note that in a society governed by law (as is the U.S.), innocense is presumed until guilt has been established. The significance of this is that no act undertaken by the management of a business firm is necessarily in violation of the law until it has been tested in the courts.

In a legal environment of presumed innocense, even though a law may declare a certain act unlawful and other firms engaging in the act have been indicted and successfully prosecuted, the act may be repeated by yet another firm. In order for the firm to be penalized under the law, the act must be detected, indicted by an appropriate legal authority, and sucessfully prosecuted in court. Because failure may occur at any of these stages, the management of a firm may behave rationally to assess the probability of detection, the probability of indictment if detected, the probability of successful prosecution if indicted, and the magnitude of the penalty if found guilty under the law. Then if the "expected value" of the penalty (i.e., the condi-tional probabilities multiplied by the likely penalty) is judged small enough, the management may deliberately assume the risks of detection and prosecution by engaging in the act. Indeed, it is not uncommon for business firms to maintain legal staffs or contingency funds to cover legal fees and any penalties which are actually assessed.

Two cautionary notes are appropriate at this point. First, even though the behavior described in the paragraph above may be rational, the reader should not take this acknowledgement as an advocacy of the assumption of risk in knowingly breaking the law. And second, although the liability of corporate shareholders is limited to their investment in the firm, corporate managers should beware of the possibility of both criminal prosecution and civil liability suits when their firms have been found guilty of violation of the law.

Rationales for Reallocation, Redistribution, and Stabilization

We shall devote Chapter E2 to the governmental rationale for reallocating resources in the economy. Suffice it to say at this point that the rationale is based upon the conclusion that the particular allocation of resources resulting from the normal functioning of the market economy is not satisfactory and needs adjustment. This conclusion may emerge if there are so-called "public goods" desired by society but not producible in response to market incentives, or if there are positive or negative externalities (or "spillovers") resulting from the market production of goods or services. The managerial implication of this rationale is that declining profits or losses will likely emerge in industries from which resources are diverted, but profitable opportunities should be found in industries toward which resources are reallocated.

The income redistribution rationale follows from a social and political judgement that incomes are being inequitably distributed across the population of the society by the normal functioning of the market economy. There is little doubt that any market economy distributes incomes unequally because of the fundamental reward mechanism of capitalism: to each according to his or her contribution to the process of production of demanded goods and services. Since members of any population possess differential abilities and experience varying intensities of drive and motivation, there will occur different contributions to the production process, and as a consequence an unequal distribution of income.

Social action becomes warranted only when it is judged that the inequality of distrubution is also inequitable. The governmental vehicles for redistribution include progressivity of income and profits taxation, the taxation of capital appreciation, and any of a wide range of possible transfer payments. One managerial implication of governmental redistribu-tion is that business net incomes, assets, and wages paid are likely to be objects of taxation to raise revenue for redistrubution to lower-income members of society. Another is that businesses catering to transfer recipient clienteles may benefit from the redistributions. However, there may be little hope for managements of business firms to exert significant control or influence upon the political process which determines how incomes are to be redistributed.

The Government's Potential for Stabilizing the Economy

The rationale for bringing the offices of government to bear upon the stability of the economy is based upon the view that market economies are naturally unstable, that the degree of instability is intoler-able, and that some force must be applied to counteract the natural instability of the market economy. Of course, the only entity in the economy which can possibly bring enough force to bear upon the problem of instability is the government. It is to this thesis that we devote Chapter F2.

CHAPTER E1 SUMMARY

1. The relationship between the firm and the government, which depends critically upon the form of economic system in place, is changing in various parts of the world.

2. In the extreme of authoritarian socialism, the microeconomic productive unit may be little more than an appendage of the state with virtually no freedom of enterprise.

3. Capitalism, in place through much of the Western world, is distinguished by private ownership of productive resources which are organized by markets.

4. In the purest form of capitalism, the role of the state is circumscribed to providing a legal and social environment which is hospitable to the functioning of the private economy.

5. Between the extremes of authoritarian socialism and pure capitalism is a wide range of governmental productive activity as well as the use of market mechanisms in conjunction with central planning.

6. In fascism, freedom of enterprise is severely restricted because although resources remain privately owned as in capitalism, the state exercises centralized authority to impose productive quotas.

7. In a centrally planned economy, a government agency in a market economy, or an organization in the not-for-profit sector of a market economy, activity is oriented toward the pursuit of some mission, but the mission is not to realize the maximum possible profit.

8. The requirement of such organizations to remain within budget is similar to the pursuit of a zero target rate of return on invested capital in the for-profit sector.

9. It should therefore be feasible for the managers of not-for-profit organizations and governmental organs to employ the same decision criteria as in the for-profit sector, but with a constraint of a zero or non-negative return.

10. In the not-for-profit sector, a variation on the Baumol thesis, i.e., that the manager attempts to pursue some non-profit objective subject to a (zero- or non-negative) profit constraint, should be applicable.

11. A problem of the not-for-profit sector or a government organ is that it is very difficult to provide the manager with performance incentives or to link the process of mission pursuit to any factor which constitutes a performance incentive, but this is not a problem of the applicability of managerial decision criteria.

12. Bureaucracy is no less a problem in the not-for-profit sector and government organs than for business firms in the for-profit sector.

13. Benefit-cost analysis, a variation on the marginal decision criteria in the for-profit sector, has been developed to provide decision criteria for the organization manager in the government and the not-for-profit sectors.

14. The marginal decision criteria of the for-profit sector are special cases of the marginal benefit-cost criteria where the benefits and costs are pecuniary values.

15. Both simple and marginal benefit-cost analyses are subject to bias and fraught with the potential for abuse.

16. Because of the subjectivity involved, two decision makers might estimate widely divergent benefit-cost ratios and reach opposite decisions.

17. Points of contact beween the firm and the government include: government demands output of firms; firms pay taxes; firms may become objects of governmental support; firms may become objects of governmental control; the activities of firms may become objects of regulation; and competition among firms may be promoted.

18. Government can effect a transformation to the characteristics of socialism by nationalizing private-sector firms.

19. Government in a market economy may pose threats to private sector firms as well as opportunities to exploit.

20. Rationales for governmental involvement in a market economy include: maintenance of an environment hospitable to enterprise; maintenance of competition; reallocation of resources; redistribution of incomes; and economic stabilization.

21. Viable competition among business firms in each market is the sine qua non of market capitalism, but firm managements find incentive to attempt to achieve monopoly.

22. The maintenance of competition requires the enactment of legislation and the vigorous enforcement of it.

23. The management of a firm may behave rationally to assess the probability of detection of a nominally illegal act, the probability of indictment if detected, the probability of prosecution if indicted, and the magnitude of penalty if found guilty, then proceed if the expected value of the penalty is judged small enough.

24. A governmental rationale for reallocating resources is based upon the conclusion that the extant allocation of resources is not satisfactory; declining profits (or losses) will likely emerge in industries from which resources are diverted, but profitable opportunities should be found in industries toward which resources are directed.

25. A governmental rationale for income redistribution follows from a social and political judgement that incomes are inequitably distributed by the market economy; business net incomes, assets, and wages paid are likely objects of taxation to raise revenue for redistribution.

26. A governmental rationale for stabilization is based upon the view that market economies are naturally unstable in intolerable degree.

CHAPTER E1 SIGNIFICANT TERMS

form of economic organization
economic system
authoritarian socialism
capitalism
fascism
micromanagement
industrial policy
macromanagement
market mechanisms
dispersed decision making
legal and social environment
mixed capitalism, socialism
freedom of enterprise
for-profit, not-for-profit sectors
mission
marginal decision criteria
budgetary non-negativity constraint
optimization
constraint
performance incentives
linkage
organizational bureaucracy
benefit-cost analysis

simple, marginal
bias, potential for abuse
predisposition
demander, supplier
dependent
taxes
object of support
industrial policy
object of regulation
competition
antitrust
nationalization
resource reallocation
income redistribution
economic stabilization
monopoly
public policy
enforcement
innocense
expected value
risk assumption
public goods
externalities
inequitable distribution

CHAPTER E1 QUESTIONS FOR DISCUSSION

1. How have the transformations in the former Soviet Union, the former Soviet bloc countries, and China changed entrepreneurial and managerial incentives to peoples in those countries? ...to people in the outside world?

2. Discuss the role of the manager of a microeconomic productive unit in an authoritarian socialist state.

3. Distinguish micromanagement, industrial organization, and macromanagement.

4. Discuss the managerial and entrepreneurial implications of constraints on freedom of enterprise in authoritarian socialism and fascism.

5. Discuss the appropriate role for government to play in an economy of pure capitalism. ...of mixed capitalism. ...of fascism. ...of authoritarian socialism.

6. Discuss the applicability of marginal decision criteria in microeconomic production units in a centrally planned and directed economy. ...in government agencies within market economies. ...in organizations in the not-for-profit sector of a market economy.

7. Discuss the applicability of marginal decision criteria when a behavioral goal or constraint is to remain within a prescribed budget.

8. Explain how the Baumol constrained sales maximization thesis can be applied to the not-for-profit sector.

9. Why are production units in centrally planned economies notorious for inefficient operation?

10. Discuss the problem of linkage in a not-for-profit organization.

11. Discuss the problem of the applicability of marginal decision criteria in a bureaucracy.

12. Explain the relationship between benefit-cost analysis and marginal decision criteria.

13. Explain how benefit-cost analysis can provide managerial decision criteria for organizations in the not-for-profit sector.

14. Why is benefit-cost analysis subject to bias and fraught with the potential for abuse?

15. Explain how an analyst's predisposition with respect to a proposed project may bear upon a benefit-cost analysis of the project.

16. Identify points of contact between business firms and the government of the economy within which they operate.

17. Explain how points of contact between business firms and the government may provide opportunities (pose threats) to the business firms.

18. Contrast the interests of business firms and the society of which they are a part in regard to competition.

19. Explain how goverments may effect transformations of their economies from capitalism to fascism. ...to socialism. What are the managerial implications?

20. Discuss the problems which coutries of Eastern Europe and the former Soviet Union seem to encounter in the effort to shift from central planning to market economy. What are the managerial implications?

21. Discuss the governmental rationale to maintain competition (to redistribute incomes; to reallocate resources; to stabilize the economy) in a market economy.

22. Describe the social transfomations likely to ensue from traumatic failure of market capitalism. ...of authoritarian socialism. What are the managerial implications in each case?

23. Why do the managements of firms in market capitalism find incentive to try to achieve monopoly of their markets? What are the managerial implications of society's efforts to prevent them from doing so?

24. Discuss the managerial implications of a presumption of innocense until proven guilty.

25. Given a legal presumption of innocense until proven guilty, describe rational behavior on the part of firm managements in regard to activities which may be unlawful.

26. Why does the incidence of externalities constitute a rationale for governmental response in market capitalism? What are the managerial implications?

27. Why does the identification of "public goods" constitute a rationale for governmental response in market capitalism? What are the managerial implications?

28. Why are income distributions typically unequal in market capitalism? Why does this circumstance constitute a rationale for governmental response? What are the managerial implications?

29. Why do market economies exhibit characteristics of instability? Why does this constitute a rational for governmental action? What are the managerial implications?