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Economics and Government Regulations

 

            Mainstream economics show that our era is intensively competitive on a global scale. However, fewer and fewer companies dominate the market in any industry. The retail sector used to be very competitive, but it is now concentrated in the hands of a few large monopolistic chains. The monopolistic and oligopolistic status of the economy leads to "too big to fail" firms. Those firms are so big and interconnected that if they collapse, the economy would fall apart. Therefore, the government has to protect these firms when they face difficulty. Government protection includes facilitating a merger, providing credits, and injecting money. This paper will discuss different economic and ethical views about "too big to fail" firms to decide whether they should be broken up. .
             A lot of economists believe that "too big to fail" firms should be broken up because of several risks associated with them. According to the article, Causes of the Recent Financial and Economic Crisis, there are three problems of "too big to fail" firms. The first problem is the moral hazard. Because these firms know that the government will not let them fail, they tend to engage in more risky activity, make more risky investment, and become more reckless. The result of this reckless attitude is an even more fragile economy. The second problem is unfair competition. Because "too big to fail" firms are guaranteed by the government, creditors and investors will invest more in big firms because they think that investing in big firms are safer than investing in small firms. The big budget and big investments from investors combining with the warrant of government create the unfair competitive advantages of large firms. This unfair competition makes it harder for small firms to survive and for new players to enter the market. The third problem is that "too big to fail" firms themselves are the major risk to the financial stability of the economy.


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