Regulatory economics
Regulatory economics is the application of
Regulation
Regulation is generally defined as legislation imposed by a government on individuals and private sector firms in order to regulate and modify economic behaviors.
For example, in most countries, regulation controls the sale and consumption of
Regulation can have several elements:
- Public statutes, standards, or statements of expectations;
- A registration or licensing process to approve and permit the operation of a service, usually by a named organization or person;
- An inspection process or other form of ensuring standard compliance, including reporting and management of non-compliance with these standards; or
- The setting of price controls in the form of price-cap regulation or rate-of-return regulation, especially for natural monopolies.
Where there is non-compliance, this can result in:
- Financial penalties; or
- A de-licensing process through which an organization or person, if judged to be operating unsafely, is ordered to stop or suffer a penalty.
Not all types of regulation are government-mandated, so some professional industries and corporations choose to adopt self-regulating models.[1] There can be internal regulation measures within a company, which work towards the mutual benefit of all members. Often, voluntary self-regulation is imposed in order to maintain professionalism, ethics, and industry standards.
For example, when a broker purchases a seat on the New York Stock Exchange, there are explicit rules of conduct, or contractual and agreed-upon conditions, to which the broker must conform. The coercive regulations of the U.S. Securities and Exchange Commission are imposed without regard for any individual's consent or dissent regarding that particular trade. However, in a democracy, there is still collective agreement on the constraint—the body politic as a whole agrees, through its representatives, and imposes the agreement on those participating in the regulated activity.
Other examples of voluntary compliance in structured settings include the activities of
In America, throughout the 18th and 19th centuries, the government engaged in substantial regulation of the economy. In the 18th century, the production and distribution of goods were regulated by British government ministries over the American Colonies (see mercantilism). Subsidies were granted to agriculture, and tariffs were imposed, sparking the American Revolution. The United States government maintained a high tariff throughout the 19th century and into the 20th century until the Reciprocal Tariff Act was passed in 1934 under the Franklin D. Roosevelt administration. However, regulation and deregulation came in waves, with the deregulation of big business in the Gilded Age leading to President Theodore Roosevelt's trust busting from 1901 to 1909, deregulation and Laissez-Faire economics once again in the roaring 1920s leading to the Great Depression, and intense governmental regulation and Keynesian economics under Franklin Roosevelt's New Deal plan. President Ronald Reagan deregulated business in the 1980s with his Reaganomics plan.
In 1946, the
Regulatory capture
Regulatory capture is the process through which a regulatory agency, created to act in the public interest, instead advances the commercial or special concerns of interest groups that dominate the industry it is meant to regulate.[2] The probability of regulatory capture is economically biased: vested interests in an industry have the greatest financial stake in regulatory activity and are more likely to be motivated to influence the regulatory body than dispersed individual consumers, each of whom has little particular incentive to try to influence regulators. Regulatory capture is a risk to which an agency is exposed by its very nature.[3]
Theories of regulation
The art of regulation has long been studied, particularly in the utilities sector. Two ideas have been formed on regulatory policy: positive theories of regulation and normative theories of regulation.
The former examine why regulation occurs. These theories include theories of market power, "interest group theories that describe stakeholders' interests in regulation," and "theories of government opportunism that describe why restrictions on government discretion may be necessary for the sector to provide efficient services for customers."[4] These theories conclude that regulation occurs because:
- the government is interested in overcoming *information asymmetries and in aligning their own interest with the operator,
- customers desire protection from market power in the presence of non-existent or ineffective competition,
- operators desire protection from rivals, or
- operators desire protection from government opportunism.
Normative economic theories of regulation generally conclude that regulators should
- encourage competition where feasible,
- minimize information asymmetry costs by gathering information and incentivizing operators to improve their performance,
- provide for economically efficient price structures, and
- establish regulatory processes that provide for "regulation under the law and independence, transparency, predictability, legitimacy, and credibility for the regulatory system."[4]
Alternatively, many heterodox economists and legal scholars stress the importance of market regulation for "safeguarding against monopoly formation, the overall stability of markets, environmental harm, and to ensure a variety of social protections."[5] These draw on sociologists (such as Max Weber, Karl Polanyi, Neil Fligstein, and Karl Marx) and the history of government institutions partaking in regulatory processes.[citation needed] "To allow the market mechanism to be sole director of the fate of human beings and their natural environment, indeed, even of the amount and use of purchasing power, would result in the demolition of society."[6]
*Information asymmetry deals with transactions in which one party has more information than the other, which creates an imbalance in power that at the worst can cause a kind of market failure. They are most commonly studied in the context of principal-agent problems.[citation needed]
Principal-agent theory addresses issues of information asymmetry.[7] Here, the government is the principal, and the operator the agent, regardless of who owns the operator. Principal-agent theory is applied in incentive regulation and multi-part tariffs.[4]
Regulatory metrics
The
The Worldwide Governance Indicators project at the World Bank recognizes that regulations have a significant impact in the quality of governance of a country. The Regulatory Quality of a country, defined as "the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development"[8] is one of the six dimensions of governance that the Worldwide Governance Indicators measure for more than 200 countries.
The cost of regulations increased by above 1 trillion and can explain 31-37% of the rise in industry concentration.[9]
Deregulation
In modern American politics
Overly complicated regulatory law, increasing inflation, concern over regulatory capture, and outdated transportation regulations made deregulation an appealing idea in the US in the late 1970s.[10][11] During his presidency (1977-1981), President Jimmy Carter introduced sweeping deregulation reform of the financial system (by the removal of interest rate ceilings) and the transportation industry, allowing the airline industry to operate more freely.[12]
President
The allure of free market capitalism remains present in American politics today, with many economists recognizing the importance of finding balance between the inherent risks associated with investment and the safeguards of regulation.
In 2017, President Donald Trump signed an executive order that he claimed would "knock out two regulations for every new regulation."[17] Trump made the claim: "Every regulation should have to pass a simple test. Does it make life better or safer for American workers or consumers? If the answer is no, we will be getting rid of it."[17]
Counterparts
A common counterpart of deregulation is the privatization of state-run industries. The goal of privatization is for market forces to increase the efficiency of denationalized industries. Privatization was widely pursued in Great Britain throughout Margaret Thatcher's administration.[18] Though largely considered a success and considerably reducing government deficit, critics argue that standards, wages, and employment declined due to privatization. Others point out that lack of careful regulations on some of the privatized industries is a source of continued problems.[19][20]
Controversy
Proponents
The regulation of markets is to safeguard society and has been the mainstay of industrialized capitalist economic governance through the twentieth century.[21][citation needed] Karl Polanyi refers to this process as the 'embedding' of markets in society. Further, contemporary economic sociologists such as Neil Fligstein (in his 2001 Architecture of Markets) argue that markets depend on state regulation for their stability, resulting in a long term co-evolution of the state and markets in capitalist societies in the last two hundred years.
Opponents
There are various
Some argue that companies are incentivized to behave in a socially responsible manner, therefore eliminating the need for external regulation, by their commitment to stakeholders, their interest in preserving reputability, and their goals for long term growth.[22]
See also
- Economic interventionism
- Financial economics § Financial markets
- Administrative law
- Averch-Johnson effect
- Banded forbearance
- Constitutional economics
- Rule according to higher law
- Deregulation
- Trust-busting
- Liberalization
- Price-cap regulation
- Natural monopoly
- Public choice theory
- Regulated market
- Regulation
- Regulation school
- Worldwide Governance Indicators
References
- ^ a b OECD Statistics Directorate. "OECD Glossary of Statistical Terms - Regulation Definition". stats.oecd.org. Retrieved 2017-02-21.
- ^ Achola Kevin
- ^ Gary Adams, Sharon Hayes, Stuart Weierter and John Boyd, "Regulatory Capture: Managing the Risk" Archived 2011-07-20 at the Wayback Machine ICE Australia, International Conferences and Events (PDF) (October 24, 2007). Retrieved April 14, 2011
- ^ a b c Body of Knowledge on Infrastructure regulation Theories of Regulation.
- )
- ^ Polanyi, Karl (1944). The Great Transformation: The Political and Economic Origins of Our Time.
- ISBN 9780262121743.
- ^ "A Decade of Measuring the Quality of Governance" (PDF). Archived from the original (PDF) on 2008-04-08.
- ^ Singla, Shikhar, Regulatory Costs and Market Power (February 23, 2023). LawFin Working Paper No. 47
- ^ Crain, Andrew D (2007). "Ford, Carter, and Deregulation in the 1970s". Journal on Telecommunications & High Technology Law. 5: 413–447.
- ^ Sherman, Matthew (July 2009). "A Short History of Financial Deregulation in the United States" (PDF). Center for Economic and Policy Research. Retrieved February 26, 2017.
- ISBN 9780807861240.
- ^ S2CID 153455946.
- ^ Insights, Forbes. "Regulatory Environment Has More Impact on Business Than the Economy, Say U.S. CEOs". Forbes. Retrieved 2017-02-28.
- ISBN 978-0-226-13802-2.
- ^ "Breaking the Impasse on Dodd-Frank | Brookings Institution". Brookings. 2017-02-28. Retrieved 2017-02-28.
- ^ a b Donald Trump
- JSTOR 1409974.
- ^ Groom, Brian (December 2011). "Privatisation defined Thatcher era". Financial Times. Archived from the original on 2022-12-11. Retrieved March 3, 2017.
- ^ Hudson, Michael (2013-04-10). "Margaret Thatcher Was a Privatization Pioneer, and This Is the Story of How Her Agenda Did Nothing But Make Life Worse for Millions of People". AlterNet. Retrieved 2017-03-03.
- ^ Polanyi, Karl (1944). The Great Transformation. Boston: Beacon Press. p. 44.
- ^ S2CID 145059055.
- ^ Green, K. (Dec 2012). "Should government force companies to be responsible?". Review - Institute of Public Affairs. Melbourne 64.4: 44–45.
Further reading
- Cebula, R., & Clark, J. (2014). Economic Freedom, Regulatory Quality, Taxation, and Living Standards, MPRA Paper 58108, University Library of Munich, Germany.
- Journal of Regulatory Economics (1989– ) [1]
- Posner, R. A. 1974 “ Theories of Regulation”, Bell Journal of Economics and Management Science, 25 (1), Spring, pp. 335–373
- Stigler, J. G. 1971, "The Theory of Economic Regulation," Bell Journal of Management Science, 2 (1), Spring, pp. 3–21
- Peltzman, S. 1989 "The Economic Theory of Regulation after a Decade of Deregulation," Brookings Papers on Economic Activity: Microeconomics, pp. 1 –41
- Laffont, J. J., & Tirole, J. (1993). A theory of incentives in procurement and regulation. MIT press.
External links
- World Bank "Doing Business project"
- Worldwide Governance Indicators Worldwide ratings of country performances on Regulatory Quality and other governance dimensions from 1996 to present.