CHAPTER 7: the political context
• The government has played a critical role in the Canadian economy
• Government has taken responsibility for the success of business
• Canadian economic system is described as mixed system
• While we possess a capitalistic economy, government plays an important role
• All developed countries have some sort of economic or business enterprise system
that essentially determines the following:
1. what goods and services are produced and distributed to society
2. how the goods and services are produced and distributed to society.
• Capitalism: type of economic system that is based on a number of fundamental
Rights of the individual
Rights of private property
The role of government
RIGHTS OF THE INDIVIDUAL:
based on the view that it is the individual who takes precedence in society, as
apposed to institutions or the overall society.
individuals have a right to pursue their own self interest
make profit from business enterprise
RIGHTS OF PRIVATE PROPERTY:
capitalism asserts that individuals have the right to own land, labor, and capital.
Permitted to own their means of production – whether its is land, labor or capital.
Capitalism advocates competition
Sufficient competition among business enterprises will ensure that business
provides the goods and services require by society at a fair cost
THE ROLE OF GOVERNMENT:
Minimal government interference in the business enterprise system
Referred to as the “free enterprise system”
Reflecting the notion of the right to private ownership of property, competition,
and restricted government involvement.
GOVERNMENT AS GUARDIAN OF SOCIETY:
Government acts as a tax collector – federal, provincial, or local level
There are 2 broad forms of taxes: revenue taxes and regulatory (restrictive) taxes.
Revenue taxes is to collect money in order to help fund government services and
Revenue taxes include individual taxes as well as corporate income tax, along
with property tax, and sales tax Individual income taxes provide the largest source of revenues for the federal and
Imposed on the income of people or on the net of profits of proprietorships and
Corporations are taxed on their net profits at a combined federal and provincial
rate than can vary among provinces and are subject to change based on
Sales tax is paid through retail stores – act as collection agents when they sell
their goods to consumers
Goods and services (GST) provides substantial funds to the federal government
Value added tax – that is paid at each step in the manufacturing process
Everyone involved in the goods and services production pays GST – only the
final consumer cannot pass the tax on to another party.
Property tax – used to fun the operating costs of the municipal government and
the services that it generates.
Restrictive (regulatory) tax – two main types – excise taxes and custom duties or
Restrictive taxes are primarily aimed at controlling the use of specific products or
Typically applied to goods or services that the government desires to restrict such
as products deemed to be potentially harmful (tobacco and alcohol)
Tariffs – form of restrictive tax
An organization accountable through a minister to parliament for its operations.
May be federal (eg: Canada post, CBC) or provincial (LCB0)
Government established crown corporations for a number of possible reasons.
1. to implement public policy that includes protecting or safeguarding national
interests – federal crown corporations such as air Canada and petro Canada helped
facilitate government policy in the area of cross Canada transportation and
Canada ownership in the domestic oil industry
2. to protect industries deemed to be vital to the economy – Canadian radio
broadcasting commission to administer a national broadcasting service in order to
prevent Canadian broadcasting becoming inundated with material originating in
3. To provide special services that could not other wise be made available by private
business – air Canada no private business was willing or able to provide domestic
4. To nationalize industries that were considered to be “natural monopolies”
including the generation and distribution of electricity
Each crown corporation is a legally distinct entity wholly owned by the crown.
Managed by a board of directors
THE REGULATOR ROLE: Government economic regulation: has been defined as the “imposition of
constraints, backed by the authority of a government that are intended to modify
economic behavior in the private sector significantly”
Regulation focused on consumer protection
Aimed at environmental protection
Why does the government need to intervene in the functioning of the business enterprise
Suggests the need for government involvement
Business enterprise system system that essentially determines what goods and
services are produced and distributed to society and how they are produced and
Society want a fair price
Decisions are made by individuals regarding their preferences for certain goods or
The supply side – businesses aim to meet the demands they face
Business supply will be responsive to consumer demand: those products and
services that are needed most will demand increased production and those no
longer in demand will have a drop in the price
Business that no longer serve a purpose will go out of business – bankrupt
Resource becomes scarce then prices will increase and this will make consumers
shift their preference to a less costly alternative
Market system is responsive to the consumer needs and to capability of the
Perfect competition: there is an optimal number of competitors in any given
industry to ensure fair pricing and distribution of goods and services to the highest
possible level of quality
Imperfect competition: occurs when fewer than the optimal number of
competitors exist to ensure this type of situation – less pressure on businesses to
offer the best possible good or service at the lowest price possible
Businesses that are not worried about competition are also not worried about
innovating, managing their operations at peak efficiency, improving
product/service quality or offering their product/services at competitive prices
Consumers will be forced to accept those types of products or services at prices
dictated by those businesses
Society is offered fewer of the goods and services citizens really want as apposed
to a situation where competition was stronger.
Central objective of the government regulation is to protect the public interest
Government can control the operations of a private enterprise through regulation
The government has also established a competition policy to control the nature of
completion in the business sector Competition policy set out in the competition act is intended to stimulate open
competition and eliminate any restrictive business practices with the aim of
encouraging maximum production, distribution and employment opportunities
Eg) government regulation in the area of public utilities such as an electric power
company or a telephone company
Government has regulated this industry because there has traditionally been an
absence of competition here.
Monitor the company’s performance as well as assess requests for rate increases
and changes in the types of services provided.
GOVERNMENT ASSISTANCE TO PRIVATE BUSINESS:
History of government involvement in business in the sense of protecting our
Eg) tariffs and non tariff barriers on imported goods were designed to protect our
domestic business by making foreign goods more expensive relative to Canadian
Incentive programs were established to encourage managers to conduct business
in a manner desired by the government
Eg) it may be desirable for managers to invest in a new product development or
engage in greater export activities or locate in an underdeveloped region
Incentives will be offered to engage in such activities
Receiving government financial support or reward for such activities would
influence decision to engage in these activities.
Refers to the government assistance given to prevent an organization or
industry from falling into bankruptcy
When they are close to bankruptcy a business will given more “liquidity” in
order to meet its financial obligations.
Liquidity refers to cash flow
The business may have short term cash flow problem but it possess sufficient
assets – so the government provide it with funds until it is stable again
Government will only help if it’s a very large company and whose failures
would affect the economy negativel