Chapter 10

Question 1

What is a business enterprise system?

Answer 1

A business enterprise system determines:

what goods and services are produced and distributed to society

how the goods and services are produced and distributed to society

Question 2

What is Capitalism?

Answer 2

Capitalism is a type of economic system that is based on a number of fundamental principles:

1.Rights of the individual
2. Rights of private property
3.Competition
4.The role of government

Question 3

Rights of the individual

Answer 3

The notion of capitalism is based on the view that it is the individual who takes precedence in society, as opposed to institutions or the overall society. This implies that individuals have every right to pursue their own self interest, which includes seeking to make profits from business enterprises. The notion of the individual as the most important element of society is not entirely representative of the ideology present in Canadian society. There are limits placed on individuals’ right to pursue their self-interest. Government regulations enforce rules that affect how business owners conduct their affairs. For example, government guidelines regarding job candidate selection criteria may affect who is hired for a job and may place emphasis on certain groups in society over others.

Question 4

Rights of private property:

Answer 4

As opposed to state ownership, capitalism asserts that individuals have the right to own land, labour, and capital. In Canada, certainly, individuals are permitted to own their means of production, whether it is land, labour, or capital. However, because there has been an uneven distribution of wealth in society, the government has intervened in a number of ways. For example, taxation is one approach that can be partly aimed at redistributing wealth among members of society. Other examples include the fact that much of the natural resources in Canada have been retained by federal or provincial governments. The government may also decide to nationalize certain products or services that it seems to be on national interest— for example, government control of health care.

Question 5

Competition

Answer 5

Capitalism advocates competition. The belief is that sufficient competition among business enterprises will ensure that business provides the goods and services required by society at a fair cost. Competition is the “ invisible hand of the market ” (in the words of economist Adam Smith) that ensures the market works in this manner. In Canada, the notion of perfect competition does not exist in practice—there is no guarantee that an adequate supply of competitors exists across all industries.

Question 6

The role of government:

Answer 6

The view of government is reflected in the French term laissez faire , which means “let people do as they choose.” This suggests minimal government interference in the business enterprise system. This notion of capitalism has also been referred to as the free enterprise system , reflecting the notion of the right to private ownership of property, competition, and restricted government involvement.

Question 7

How is Canada’s government structured?

Answer 7

Federal
Provincial
Municipal

Question 8

Federal

Answer 8

is the highest level of government and applies to all Canadians. Generally, federal responsibilities are very wide. Some roles include national defence, criminal law, bankruptcy law, postal service, foreign policy, currency, First Nations, banking, and immigration.

Question 9

Provincial

Answer 9

is more regional in nature and only affects those citizens and residents who reside in a particular province. Provincial responsibilities include highways, transportation, education, and health care. Since each provincial government is a separate and unique jurisdiction, provinces can have laws and regulations that differ from other provinces. In Ontario, for example, the provincial government owns and controls the sale of distilled spirits through the Liquor Control Board of Ontario (LCBO), a provincial Crown corporation. In Alberta, however, the provincial government does not own or control the sale of alcohol but only regulates it.

Question 10

Municipal

Answer 10

is the lowest level of government. A municipal government can govern a city or a smaller community, such as a town, village, or parish. In Canada, there are over 4,000 municipal governments. Some municipal responsibilities can include police services, fire protection, land planning, sewage, public transportation, garbage collection, and library services.

Question 11

What roles do governments serve?

Answer 11

Tax Collector
Business Owner
Regulator

Question 12

Tax collector

Answer 12

Revenue taxes:
Individual income tax
Corporate income tax
Sales tax
Property tax

Question 13

Revenue taxes

Answer 13

is to collect money to help fund government services and programs. They include individual income taxes as well as corporate income tax , along with property tax and sales tax.

Question 14

Individual income

Answer 14

taxes have provided the largest source of revenue for the federal and provincial governments. Individual income tax is levied on the income of individuals or on the net profits of proprietorships and partnerships. Corporate income tax has provided the second largest source of revenue for the federal government.

Question 15

Corporate income tax

Answer 15

are taxed on their net profit at a combined federal and provincial rate that can vary among provinces and that is subject to change based on government policy.

Question 16

Sales taxes

Answer 16

are an important source of revenue for most provinces, as well as for the federal government. This tax is paid through retail stores, which act as collection agents when they sell their goods to consumers.

Question 17

property taxes

Answer 17

is the largest revenue source for municipal governments. The revenue gained from this form of tax is typically used to fund the operating costs of the municipal government and the services that it provides.

Question 18

Restrictive taxes:

Answer 18

taxes when the government is trying to control or curb an activity.

Examples:
alcohol
Cigarettes

Question 19

Business Owner Crown Corporation

Established To:

Answer 19

implement public policy that includes protecting or safeguarding national interests

protect industries deemed to be vital to the economy

provide special services that could not otherwise be made available by private business

nationalize industries that are considered to be “natural monopolies,” including the generation and distribution of electricity

Question 20

The Regulator
What are regulations?

Answer 20

Constraints to modify economic behaviour

Question 21

What do they aim to achieve? (regulations)

Answer 21

To protect the consumer

To protect the environment

To protect fair competition

Question 22

How much should the Government help business?

Government as Guardian of Business

Answer 22

1. Nurturing Young Industries
2. Encouraging Direct Foreign Investment
3. Offering Subsidies to Compete Globally
4. Maintaining Adequate Levels of Domestic Employment
5. Protecting Against Unfair Global Competition
6. Maintaining Favourable Balance of Trade

Question 23

Nurture Young Industries

Answer 23

The infant-industry argument asserts that government should help a young industry to grow and develop by ensuring that the industry maintains a dominant share of the domestic market until it is mature enough to compete against foreign companies. Consequently, this philosophy is still applied, particularly among developing countries. The rationale is that the infant industry may be less competitive, particularly because of initially high output costs; however, with maturity the production will become more efficient and protection will no longer be necessary.

Question 24

Encourage Foreign Direct Investment

Answer 24

The action of reducing foreign imports may result in the foreign business directly investing in the target country instead. That is, a foreign company can decide to set up business in the target country if it wishes to gain access to that country’s consumer market and it is unable to achieve that with imports. Of course, from the domestic country’s viewpoint, this foreign direct investment may be desirable if it increases job

opportunities, contributes to the growth of industry, and adds to the amount of capital.

Question 25

Maintain a Favourable Balance of Trade

Answer 25

• trade surpluses
• trade deficit

Question 26

Protecting Against Unfair Global Competition

Answer 26

There is a concern among some businesses that foreign competitors will offer their products at extremely low prices as a means of monopolizing their share of the target country’s market. The

ultimate consequence would be that domestic producers could potentially be driven out of business and be replaced by the foreign imports. Therefore, domestic business needs to be protected.

Question 27

Maintaining adequate levels of domestic employment

Answer 27

In the past, the government protected Canadian business and employment from the risk of foreign competition via the implementation of tariffs. Clearly, such an option is complicated by the fact that reducing imports is not necessarily feasible. Protectionist policies are not compatible with the sentiments of free trade, and thus governments are sometimes placed in the unenviable position of balancing the needs of the domestic economy with the need to honour the rules governing global business.

Question 28

Offering subsidies to compete globally

Answer 28

Whether it is for the purpose of maintaining employment levels or of assisting businesses in the global marketplace, the issue of government subsidies to business has become much more controversial in the context of globalization.

Whether it is cash payments, low-interest loans, or tax breaks, such financial assistance is referred to as a subsidy. And in the case of the global context, such subsidies are intended to help domestic industry deal with global competition. In recent years, the World Trade Organization (WTO) has been involved in many international disputes regarding whether a local government has given its domestic industry an unfair advantage through some form of subsidy.

Question 29

Government NOT as Guardian of Business?

Answer 29

1. Promotes a Political Agenda
2. Creates an Uneven Playing Field
3. Undermines Public Confidence in Politicians
4. Contrary to Free and Open Markets
5. Creates Dependency
6. Benefits Only a Few

Question 30

What is deregulation?

Answer 30

Deregulation involves a reduction in the number of laws or regulations affecting business activity. It also suggests a reduction of the powers of government enforcement agencies and other forms of government control or influence.

Question 31

Deregulation:
Benefits and Risks

Answer 31

Benefits:
Increased competition
Lower prices
Improved products and services

Risks:
Consumer exploitation
Reduction in the quality of products or services
Increased consumer prices (less laws governing industry)

Question 32

What is privatization?

Answer 32

divesting of government involvement in the operation, management, and ownership of activities

Question 33

Why do governments’ privatize?

Answer 33

1. Belief in the Power of Competition as a Control Mechanism

2.Belief that Private Business Can Operate More Efficiently

3.No Longer Need Public Involvement in Some Sectors

4. Financial Benefits from Selling Government-Owned Assets

Question 34

Challenges to “Going” Private

Answer 34

1. Stakeholders and Objectives
2. Employees’ Objectives

3.The Public’s Objectives

Question 35

Stakeholders

Answer 35

The objectives of various stakeholders in the privatization of a Crown corporation may be different and potentially conflicting. Consider, for example, the stakeholders affected by the privatization of public utilities, which may include government owners, other government parties (that is, other levels of government), creditors, future shareholders of the organization, unionized and non-unionized employees of the corporation, regulators, taxpayers, consumers, and other existing or potential competitors in the industry.

Question 36

Employees

Answer 36

A possible cost of privatization is massive layoffs of public employees, particularly in developing and transition countries. For example, the privatization of Argentina’s national

rail company in 1991 involved laying off almost 80% of the company’s total workforce as part of the restructuring.

Question 37

The Public

Answer 37

Another possible conflict is between the objectives cited and the public’s concern for their “protection.” For example, in the case of Ontario Hydro, some citizens were concerned that private competitors may be less likely to serve the public’s interests than a government-owned enterprise. Consequently, some fear that privatization will bring higher rates and safety concerns.

Question 38

Should the LCBO be privatized?
Pros and Cons?

Answer 38

Pros
End a monopoly and open competition
Reduce prices
Improve service

Cons
Loss of Ontario provincial government tax revenue of $1.55 billion
Private retailers may not impose ID checks for minors as regularly
Availability of alcohol in more places may encourage more drinking and alcohol-related deaths