Cronyism
Cronyism is a practice in which particular businesses receive preferential treatment from government authorities, often to the benefit of politicians. This can manifest in various ways, such as through tailored tariffs, tax credits, or regulations that create advantages for specific companies while disadvantaging others. Unlike legitimate government regulations aimed at protecting workers or promoting fair competition, cronyism distorts the free market by enabling certain businesses to dominate, potentially leading to monopolies or oligopolies that inflate prices and stifle innovation. In extreme cases, government officials may grant local monopolies or provide bailouts to failing businesses, further limiting competition. The implications of cronyism can be significant, as it may result in higher prices for consumers and limit their choices in the marketplace. Throughout history, various governments have engaged in cronyism, impacting industries such as telecommunications and automotive manufacturing. Overall, cronyism is often viewed as detrimental to the principles of a competitive market economy, as it undermines fair business practices and consumer trust.
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Subject Terms
Cronyism
Cronyism is the process of favoring a particular business in a market economy, typically to benefit a politician. Government regulations that are designed to protect workers, encourage competition, or aid the economy do not qualify as cronyism.
Cronyism takes a variety of forms, including the targeted application of tariffs, tax credits, regulations, and market privileges. In extreme cases, government officials might provide a local or temporary monopoly, effectively eliminating competition and allowing the affected business to artificially inflate the value of its products. It may also take the form of bailouts, when failing businesses are given large amounts of working capital by the government.
Because it favors businesses in a way that the free market does not, cronyism often results in consequences that harm consumers. It allows businesses to set prices that customers would not pay if fair competition was available. It also slows innovation by stifling competition, making it easier for businesses to remain in the market despite inefficient or anti-consumer practices.
Background
Free markets function on the basis of competition. Businesses have the ability to produce whatever goods they believe people will purchase and charge whatever price they feel is appropriate. Similarly, consumers have the ability to choose which products they want to purchase and the price that they are willing to pay. Over time, consumers and businesses should be able to find a common ground, resulting in fair pricing.
Under this model, prices are typically modified by supply and demand. If the two factors are the same, then the price of a given product will remain stable. If the supply of a product increases while the demand for it remains the same, the price of the product will fall. However, if supply decreases while the demand stays the same, the price of the product will rise.
In order for a market economy to work effectively, businesses must compete. Consumers need to be able to choose between various options, choosing the one that is most favorable to them. This gives the consumer some power regarding the exchange. If multiple businesses are competing for consumers’ interest, businesses will be under pressure to provide the best deal that they possibly can. However, if one business manages to drive its rivals out of the market, securing the entire supply of a single product, that business becomes a monopoly. A monopoly can charge whatever it wants for a given product because it lacks competition. Some markets become oligopolies, which refers to several large businesses engaging in price-fixing to artificially inflate the value of a product. The large businesses in oligopolies do not truly compete with one another, but instead work to collectively drive new businesses out of the market.
Overview
Cronyism is one method by which businesses work to artificially increase their share of the market, inflating the prices of goods and removing competition in an otherwise free market. Cronyism occurs when the government gains power over a given market. In these instances, the government may impose rules and regulations that uniquely favor one part of the market, while directly harming other parts. In some instances, rules and regulations do not institute cronyism, as they serve to regulate the market. For example, the government may institute minimum-wage laws to ensure that workers are paid a fair value for their labor or health regulations to ensure that workers may carry out their jobs safely.
However, when regulations are applied in an intentionally unfair manner, they may constitute cronyism. For example, the government may grant special privileges to one type of business, while harshly enforcing difficult-to-meet regulations on other businesses in the same market. This may be conducted to intentionally encourage one type of business, such as encouraging the energy market to shift away from fossil fuels and toward green energy. It may also be conducted to aid a struggling business that employs a large number of workers, saving those workers’ jobs.
In some instances, cronyism is carried out because of corrupt government officials. On these occasions, policymakers benefit in some way from seeing one business succeed or from seeing another business fail. They provide significant benefits to their favored businesses, often enriching themselves, while making it easier for that business to compete.
Cronyism has occurred in many forms throughout history. Governments may grant one business a temporary monopoly, suppressing competition and heavily favoring that business. For example, many regions of the United States allow only one television cable company to operate in a specific region, giving that company a monopoly. The same is often true of Internet service providers and other utilities.
Governments may also use quotas, or tariffs, to protect the value of domestic businesses. These economic tools make it more difficult for foreign businesses to compete in a specific country, heavily favoring domestic businesses by artificially raising the price of foreign products. For example, if American auto manufacturers were struggling, the government might use tariffs to artificially increase the price of foreign vehicles, making the public more likely to purchase from domestic car manufacturers. Governments may also provide businesses with tax credits, decreasing the amount of taxes that businesses must pay to the government and increasing their profit margins.
Cronyism is often considered a negative aspect of limited free markets. It results in some businesses being unfairly favored over other businesses. This reduces competition, slowing innovation and the development of new products. It also may artificially inflate prices, reducing the consumer’s power in the market.
Bibliography
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