Regulation

Question 1

Purposes of Regulation

Answer 1

• To prevent deaths
• Optimize social welfare
• Correct/prevent market failures
• Reduce negative externalities.

Question 2

Three Kinds of Regulation

Answer 2

1. Market Regulation
2. Government/Fiat Regulation
3. Private entities

Question 3

Market Regulation

Answer 3

Consumers support or withdraw from buying a product

Question 4

Government/Fiat Regulation

Answer 4

Declaration of standards. Government regulation in the US is usually tempered/aggravated by a public comment period.

Question 5

Private Entity Regulation

Answer 5

Manufactures voluntarily join a 3rd party verifying organization to insure quality standards. Home Owners Associations are also examples of these informal institutions.

Question 6

2 theories regarding regulation

Answer 6

1. Public Interest Theory

2. Capture Theory

Question 7

Public Interest Theory

Answer 7

Pro regulation

• don’t trust people or the market.
• Maybe transaction costs are high and it would be more efficient for the government to solve a negative externality problem.

Question 8

Capture Theory

Answer 8

• Interest groups use coercive power of government to their own advantage.
• Public Choice – Outside interest groups are seeking rents and extracting rents and regulation is a good way to exclude competition.
• Government decided to regulate things so it would be in control.
• Bootleggers and Baptists are also causes for regulation. People can have different reasons for supporting the same policy.

Question 9

Two categories of regulation

Answer 9

1. Economic

2. Social

Question 10

Three ways to implement regulation

Answer 10

1. Prohibition
2. Design/Process standards (you must do this exactly this way)
3. Performance standards (I set the bar, figure it out)