Which of the six basic economic functions of government is being performed when government makes insider trading illegal?
1. Providing a stable of institutions and rules.
2. Promoting effective and workable competition.
3. Correcting for externalities.
4. Ensuring economic stability and growth.
5. Providing public goods.
6. Adjusting for undesirable market results.
Of these choices, the best answer is #1.
It would be possible to argue that #3 is correct. You could say that insider trading creates negative externalities that are inflicted on the other people who are trading in the market without insider knowledge. However, insider trading is not usually seen in this way.
The best answer is #1. What government is doing here is setting up a clear set of rules for what can and cannot be done. That way, the economy can be predictable to some degree because everyone knows what the rules of the game are.
“Providing a stable of institutions and rules” (#1 on the list in the question posed) is the basic economic function of government being performed when the government makes insider trading illegal.
Illegal insider trading involves being privy to information that the general public is not privy to. This means that the person doing the insider trading has an advantage over others, which tips the balance in his or her favor when it comes time to buying equities and such on the public market.
As a result, when the government imposes rules to make this illegal it is safeguarding investors so that everyone has access to all information available so they can make informed decisions when it comes to trading on the stock market.
I believe that #1 is the best answer to the question. Nonetheless, #6 “Adjusting for undesirable market results” is also somewhat appropriate because the government is trying to have a level playing field when it comes to trading on the stock market. They don’t want anyone to have an unfair advantage in this regard. They are making adjustments through setting in place rules so that insider trading does not contribute to undesirable, and also skewed financial markets results.