Name one US policy that aims to maintain barriers to entry and describe how it does so.
The correct answer and explanation is:
One U.S. policy that aims to maintain barriers to entry is the Federal Reserve’s monetary policy, particularly through the use of interest rates. By adjusting the federal funds rate, the Federal Reserve can influence the cost of borrowing, which in turn affects the economy’s liquidity and the ease with which new businesses can enter the market.
When the Federal Reserve raises interest rates, borrowing becomes more expensive. This can deter new entrepreneurs or businesses from taking loans to start or expand their operations. The higher cost of financing limits access to capital, which serves as a barrier for many would-be market entrants, especially for smaller companies or startups that rely heavily on loans to fund their operations.
Additionally, the policy indirectly benefits larger, well-established companies that have easier access to capital at competitive rates, thereby maintaining their dominance in the market. This creates an uneven playing field where new businesses face higher entry costs, making it more difficult for them to compete. The reduction in liquidity further exacerbates the challenge, as fewer funds are available for investments in new ventures.
The Federal Reserve’s decisions on interest rates are made to manage inflation and stabilize the economy, but they also impact the level of competition in various markets. For new entrants, these policies represent an entry barrier, reducing their ability to compete with established firms that are better positioned to weather higher financing costs.
In conclusion, the Federal Reserve’s monetary policy serves as an indirect barrier to market entry by making borrowing more expensive, limiting the availability of capital for new businesses, and thus protecting the competitive advantage of larger, established companies.