Government Influence on Business

Hi Guys, in the last session we discussed the influence of businesses over its societies, and the concept of external and private costs.

However, today we will be studying the influence of government on the businesses.

Before we directly move onto the activities of governments in the economic sphere. We must know its objectives, some of which are:

  1. Low inflation: Obviously, a government would want goods to be economical and within the reach of lower class.
  2. Low levels of unemployment: Unemployment causes the waste of a country’s resources as due to greater unemployment there will be more people who would consume without producing anything.
  3. Economic growth: This can be defined as the growth of a country’s GDP, economic growth improves the living standard of people.

Now  inflation is a troubling issue as it would not only cause the prices of goods to be higher but may also persuade people to buy foreign goods which are cheap, thereby causing local businesses a loss and lead to workers losing their jobs. It is due to these effects that a government would want to keep the prices low.

Unemployment is also a bane of a community as it will not be utilizing all its potential workforce. This may cause unemployed people to move to other countries to seek jobs.

Furthermore, Economic growth is very important to a country as it determines the lives of its people. There is a cycle known as the ‘economic’ or ‘trade cycle’.    


This cycle shows the phases through which an economy passes. If the recovery, in the form of economic growth, does not stop it goes on to become a boom which then leads to recession. And that is where government steps in, A government stop the boom from occurring( which is a phase of heave spending) by increasing taxes, interest rates etc. in order to limit business activity. This way the governments keep recession from happening.

Government policies

In order to fulfill its objectives and successfully maneuver business activity, a government uses its powers.

Fiscal policy: It is any change by the government on tax rates or public sector spending.

The government imposes taxes in two ways, Direct taxes and Indirect taxes.

       In indirect taxes it attaches tax to the value of a business’s goods, so that when you pay for it you automatically pay the tax. GST or General Sales Tax is the name given to this type of indirect tax. Next time when you go to buy pair of shoes don’t forget to check the inner sole of the shoe, you will see the word G.S.T written and the amount too.

Direct taxes are imposed on our incomes and deducted directly from them. As well as profits tax which is deducted from the profits a business makes.

By increasing these taxes a government can limit its public’s expenditure and prevent recession.

Another way to prevent recession or economic downturn is to restrict imports. To do this a government can impose import tariffs or quotas. This means that for every good imported the importer has to pay tax. By doing this a government limits its imports thereby achieving economic security for local firs and also stabilizing balance of payments.

What does a government do for society? Well, a government does consider the welfare of the society first and foremost. By deciding where a business should locate, the governments influence it to build only in only those locations where It would not be able to pollute an unspoiled area and emit pollution in the form of air, or noise.

Also by ensuring that businesses produce only those goods that do not harm humans in a greater way, the government is ensuring the safety and welfare of its citizens.

Moreover, there have been numerous laws and regulations which protect consumers by ensuring that business

  1. Do not sell goods that don’t live up to their claims
  2. Do not give misleading prices
  3. Can give certain goods to consumers on credit

Monopolies are also very unfair, in that they don’t allow new firms to settle in the market. This reduces competition and enables the business to charge whatever price it feels. The governments take strict measures in stopping such businesses from operating them, either by making such forms of business illegal or by investigating and then acting.

When we talk about citizens we do not only mean consumers but also workers who are given protection by the government. This protection can be in the form of discrimination laws which prohibit employer preference based on color, cast, gender etc. And also in the form of minimum wage, this policy makes businesses pay the minimum amount of wage that a government has set for workers.

Govt. Supply side policies       

A govt. doesn’t only put restrictions on businesses, it also helps them. Especially smaller firms, which are labor intensive and provide employment to many people, are helped by the government through imposition of less tax and on occasions, financial aid.

Exports are also very important to a country’s foreign exchange. Governments help exporters to increase output by allocating special areas called Export Processing Zones (EPZs) to enhance their productivity and standards, the government also allows them to import machinery free of any tariffs.

In this way government helps businesses to flourish and add to the economic and social well being of the country. This policy is known collectively as “Supply Side policies”.  



Q.1 What is a fiscal policy?

Ans. Well, a fiscal policy can be defined as any change in tax rates or public sector spending by the government. The word fiscal relates to financial meaning money or expenditure.

Q.2 Why do governments put so much restrictions on businesses?

Ans. Government restrictions on  a business can be in the form of fiscal policy, monetary policy or/and building permissions.

By doing this a government maintains balance between business’s tendency to make profit and the economic well being of the society. Without these restrictions businesses would have no regard of the external costs of their decisions.

Also the governments prevent a recession from occurring by restricting businesses and consumers from spending too much money.

The government restrictions also prevent from monopolies forming. This creates competition between firms and ultimately benefits the consumer.

It is for these reasons that a government puts restrictions on businesses.