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Regulatory economics is the
economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...
of
regulation Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. ...
. It is the application of
law Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...
by
government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government i ...
or
regulatory agencies A regulatory agency (regulatory body, regulator) or independent agency (independent regulatory agency) is a government authority that is responsible for exercising autonomous dominion over some area of human activity in a licensing and regulati ...
for various purposes, including remedying
market failure In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indiv ...
, protecting the environment and economic management.


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. Conflict can occur between
public service A public service is any service intended to address specific needs pertaining to the aggregate members of a community. Public services are available to people within a government jurisdiction as provided directly through public sector agencies ...
s and commercial procedures (e.g. maximizing
profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory inter ...
), the interests of the people using these services (see
market failure In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indiv ...
), and also the interests of those not directly involved in transactions (
externalities In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either c ...
). Most governments, therefore, have some form of control or regulation to manage these possible conflicts. The ideal goal of economic regulation is to ensure the delivery of a safe and appropriate service, while not discouraging the effective functioning and development of businesses. For example, in most countries, regulation controls the sale and consumption of
alcohol Alcohol most commonly refers to: * Alcohol (chemistry), an organic compound in which a hydroxyl group is bound to a carbon atom * Alcohol (drug), an intoxicant found in alcoholic drinks Alcohol may also refer to: Chemicals * Ethanol, one of sev ...
and
prescription drug A prescription drug (also prescription medication or prescription medicine) is a pharmaceutical drug that legally requires a medical prescription to be dispensed. In contrast, over-the-counter drugs can be obtained without a prescription. The r ...
s, as well as the food business, provision of personal or residential care, public transport, construction, film and TV, etc.
Monopolies A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a speci ...
, especially those that are difficult to abolish (
natural monopoly A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming adv ...
), are often regulated. The
financial sector Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, ...
is also highly regulated. 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 Price-cap regulation is a form of regulation. Designed in the 1980s by UK Treasury economist Stephen Littlechild, it has been applied to all privatized British network utilities. It is contrasted with both rate-of-return regulation, with utilities ...
or
rate-of-return regulation Rate-of-return regulation is a system for setting the prices charged by government-regulated monopolies, such as public utilities. Its main premise is that monopolies must charge the same price that would ideally prevail in a perfectly competitive m ...
, 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. 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 The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City. It is by far the world's largest stock exchange by market capitalization of its liste ...
, 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
Major League Baseball Major League Baseball (MLB) is a professional baseball organization and the oldest major professional sports league in the world. MLB is composed of 30 total teams, divided equally between the National League (NL) and the American League (A ...
,
FIFA FIFA (; stands for ''Fédération Internationale de Football Association'' (French), meaning International Association Football Federation ) is the international governing body of association football, beach football and futsal. It was found ...
, and the Royal Yachting Association (the UK's recognized national association for sailing). Regulation in this sense approaches the ideal of an accepted standard of
ethics Ethics or moral philosophy is a branch of philosophy that "involves systematizing, defending, and recommending concepts of right and wrong behavior".''Internet Encyclopedia of Philosophy'' The field of ethics, along with aesthetics, concer ...
for a given activity to promote the best interests of those participating as well as the continuation of the activity itself within specified limits. 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 Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce ...
). 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 The Reciprocal Tariff Act (enacted June 12, 1934, ch. 474, , ) provided for the negotiation of tariff agreements between the United States and separate nations, particularly Latin American countries. The Act served as an institutional reform inte ...
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 Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output ...
under Franklin Roosevelt's New Deal plan. President Ronald Reagan deregulated business in the 1980s with his Reaganomics plan. In 1946, the U.S. Congress enacted the Administrative Procedure Act (APA), which formalized means of ensuring the regularity of government administrative activity and its conformance with authorizing legislation. The APA established uniform procedures for a federal agency's promulgation of regulations and adjudication of claims. The APA also sets forth the process for
judicial review Judicial review is a process under which executive, legislative and administrative actions are subject to review by the judiciary. A court with authority for judicial review may invalidate laws, acts and governmental actions that are incomp ...
of agency action.


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. 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.


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." 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." 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." These draw on sociologists (such as
Max Weber Maximilian Karl Emil Weber (; ; 21 April 186414 June 1920) was a German sociologist, historian, jurist and political economist, who is regarded as among the most important theorists of the development of modern Western society. His ideas p ...
,
Karl Polanyi Karl Paul Polanyi (; hu, Polányi Károly ; 25 October 1886 – 23 April 1964),''Encyclopædia Britannica'' (Chicago: Encyclopædia Britannica Inc. 2003) vol 9. p. 554 was an Austro-Hungarian economic anthropologist and politician, best known ...
,
Neil Fligstein Neil Fligstein (born May 23, 1951) is an American sociologist and a professor at the University of California, Berkeley. He is known for his work in economic sociology, political sociology, and organizational theory. He has produced both empiric ...
, and
Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...
) and the history of government institutions partaking in regulatory processes. "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." *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. Principal-agent theory addresses issues of information asymmetry. 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.Body of Knowledge on Infrastructure regulation
Theories of Regulation.


Regulatory metrics

The
World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
'
''Doing Business'' database
collects data from 178 countries on the costs of regulation in certain areas, such as starting a business, employing workers, getting credit, and paying taxes. For example, it takes an average of 19 working days to start a business in the
OECD The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate ...
, compared to 60 in
Sub-Saharan Africa Sub-Saharan Africa is, geographically, the area and regions of the continent of Africa that lies south of the Sahara. These include West Africa, East Africa, Central Africa, and Southern Africa. Geopolitically, in addition to the List of sov ...
; the cost as a percentage of GNP (not including bribes) is 8% in the OECD, and 225% in Africa. The
Worldwide Governance Indicators Based on a long-standing research program of the World Bank, the Worldwide Governance Indicators capture six key dimensions of governance (Voice & Accountability, Political Stability and Lack of Violence, Government Effectiveness, Regulatory Q ...
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"'' is one of the six dimensions of governance that the
Worldwide Governance Indicators Based on a long-standing research program of the World Bank, the Worldwide Governance Indicators capture six key dimensions of governance (Voice & Accountability, Political Stability and Lack of Violence, Government Effectiveness, Regulatory Q ...
measure for more than 200 countries.


Deregulation


In modern American politics

Overly complicated regulatory law, increasing inflation, concern over
regulatory capture In politics, regulatory capture (also agency capture and client politics) is a form of corruption of authority that occurs when a political entity, policymaker, or regulator is co-opted to serve the commercial, ideological, or political interests ...
, and outdated transportation regulations made deregulation an appealing idea in the US in the late 1970s. During his presidency (1977-1981), President
Jimmy Carter James Earl Carter Jr. (born October 1, 1924) is an American politician who served as the 39th president of the United States from 1977 to 1981. A member of the Democratic Party (United States), Democratic Party, he previously served as th ...
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. President
Ronald Reagan Ronald Wilson Reagan ( ; February 6, 1911June 5, 2004) was an American politician, actor, and union leader who served as the 40th president of the United States from 1981 to 1989. He also served as the 33rd governor of California from 1967 ...
took up the mantle of deregulation during his two terms in office (1981-1989) and expanded upon it with the introduction of
Reaganomics Reaganomics (; a portmanteau of ''Reagan'' and ''economics'' attributed to Paul Harvey), or Reaganism, refers to the neoliberal economic policies promoted by U.S. President Ronald Reagan during the 1980s. These policies are commonly associat ...
, which sought to stimulate the economy through income and corporate tax cuts coupled with deregulation and reduced government spending. Though favored by industry, Reagan-era economic policies concerning deregulation are regarded by many economists as having contributed to the Savings and Loan Crisis of the late 1980s and 1990s. 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. Some, particularly members of industry, feel that lingering regulations imposed after the financial crisis of 2007 such as the Dodd-Frank financial reform act are too stringent and impede economic growth, especially among small businesses. Others support continued regulation on the basis that deregulation of the financial sector led to the 2007 financial crisis and that regulations lend stability to the economy. In 2017, President
Donald Trump Donald John Trump (born June 14, 1946) is an American politician, media personality, and businessman who served as the 45th president of the United States from 2017 to 2021. Trump graduated from the Wharton School of the University of P ...
signed an executive order that he claimed would "knock out two regulations for every new regulation."Donald Trump 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."


Counterparts

A common counterpart of deregulation is the
privatization Privatization (also privatisation in British English) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when ...
of state-run industries. The goal of privatization is for market forces to increase the
efficiency Efficiency is the often measurable ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do things well, successfully, and without ...
of denationalized industries. Privatization was widely pursued in Great Britain throughout
Margaret Thatcher Margaret Hilda Thatcher, Baroness Thatcher (; 13 October 19258 April 2013) was Prime Minister of the United Kingdom from 1979 to 1990 and Leader of the Conservative Party from 1975 to 1990. She was the first female British prime ...
's administration. 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.


Controversy


Proponents

The regulation of markets is to safeguard society and has been the mainstay of industrialized capitalist economic governance through the twentieth century.
Karl Polanyi Karl Paul Polanyi (; hu, Polányi Károly ; 25 October 1886 – 23 April 1964),''Encyclopædia Britannica'' (Chicago: Encyclopædia Britannica Inc. 2003) vol 9. p. 554 was an Austro-Hungarian economic anthropologist and politician, best known ...
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

This position is alternatively summarized in what is known as the Iron Law of Regulation, which states that all government regulation eventually leads to a net loss in social welfare. 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.


See also

*
Economic interventionism Economic interventionism, sometimes also called state interventionism, is an economic policy position favouring government intervention in the market process with the intention of correcting market failures and promoting the general welfare of ...
*
Administrative law Administrative law is the division of law that governs the activities of executive branch agencies of government. Administrative law concerns executive branch rule making (executive branch rules are generally referred to as " regulations"), ...
* Averch-Johnson effect * Banded forbearance *
Constitutional economics Constitutional economics is a research program in economics and constitutionalism that has been described as explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of econo ...
* Rule according to higher law *
Deregulation Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a ...
*
Trust-busting Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust l ...
*
Liberalization Liberalization or liberalisation (British English) is a broad term that refers to the practice of making laws, systems, or opinions less severe, usually in the sense of eliminating certain government regulations or restrictions. The term is used m ...
*
Price-cap regulation Price-cap regulation is a form of regulation. Designed in the 1980s by UK Treasury economist Stephen Littlechild, it has been applied to all privatized British network utilities. It is contrasted with both rate-of-return regulation, with utilities ...
*
Natural monopoly A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming adv ...
*
Public choice theory Public choice, or public choice theory, is "the use of economic tools to deal with traditional problems of political science".Gordon Tullock, 9872008, "public choice," ''The New Palgrave Dictionary of Economics''. . Its content includes the st ...
*
Regulated market A regulated market (RM) or coordinated market is an idealized system where the government or other organizations oversee the market, control the forces of supply and demand, and to some extent regulate the market actions. This can include tasks s ...
*
Regulation Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. ...
*
Regulation school The regulation school (french: l'école de la régulation) is a group of writers in political economy and economics whose origins can be traced to France in the early 1970s, where economic instability and stagflation were rampant in the French ec ...
*
Worldwide Governance Indicators Based on a long-standing research program of the World Bank, the Worldwide Governance Indicators capture six key dimensions of governance (Voice & Accountability, Political Stability and Lack of Violence, Government Effectiveness, Regulatory Q ...


References


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–

* 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. {{Authority control Monopoly (economics) Market structure Public choice theory