Chapter 10 Business And Its Environment PDF

Regulation: Law, Economics, and Politics Chapter 10 10-1 Copyright © 2013 Pearson Edu...

Regulation: Law, Economics, and Politics Chapter 10 10-1 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Topics Covered Introduction Periods of regulatory change Regulatory commissions and agencies The nonmarket environment of regulatory agencies Explanations for regulation Market imperfections Deregulation 10-2 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Introduction Regulation is government intervention in economic activity using commands, controls, and incentives. Regulation takes place through a public process that is relatively open and allows participation by interested parties. Regulatory decisions and rule-making proceedings are extremely important to many firms, industries, and interest groups. 10-3 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Set of Interventions – Examples Controlling prices Ensuring equal opportunity Specifying qualifications Limiting ownership Ensuring product safety Establishing performance standards Controlling toxic emissions and other pollutants Controlling unfair international trade practices Protecting consumers 10-4 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Periods of Regulatory Change Four major periods of regulatory change: 1) Populist era (late 1800s) Nonmarket action by interest groups. 2) Progressive era and the New Deal Regulation extended to labor markets, industries, securities, banks etc.… 3) Social regulation (began in the 1960s) Social regulation related to the environment and workplace. 4) Economic deregulation (began in the 1970s) Economic deregulation in several industries such as electric 10-5 power, air transport etc.… Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Figure 10.1 - Principal Federal Regulatory Agencies and Commissions 10-6 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Delegation, Rule Making, Due Process, and Discretion Congress enacted the Administrative Procedure Act (APA) of 1946 to provide for public notice and comment prior to agency action; The APA grants parties right to sue for judicial review of an agency action. The APA requires: Agency actions not be arbitrary, an abuse of discretion, or otherwise not in accordance with law. The courts review regulatory actions for whether they are arbitrary or unlawful. 10-7 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Figure 10.2 - Influences on Regulatory Agencies 10-8 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Explanations For Regulation Two theories to explain where regulation is and is not imposed: 1) Theory of market imperfections Predicts that regulation will be instituted to correct market imperfections. 2) Political theory Predicts that interest groups seek regulation to serve their interests. 10-9 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Market Imperfections Natural monopoly Externalities Public goods Asymmetric information, Adverse selection, and Moral hazard Government imperfections 10-10 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Natural Monopoly A monopoly is natural if one firm can produce a given set of goods at lower cost than can any larger number of firms. Electric power and telecommunications have been subject to price regulation based on a natural monopoly rationale. However, competition continues to replace regulation. 10-11 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Types of Externalities Pecuniary externality Present when an action of one economic agent affects other economic agents through changes in the prices of goods and services. Nonpecuniary externality Occurs when an action of one economic agent directly affects the preferences or production opportunities of another economic agent. 10-12 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Public Good A public good is one whose consumption by one person does not reduce its availability for others. Some public goods are provided by the government. Examples: national defense, roads, bridges etc. Public goods can also be supplied by the private sector. Examples: Radio and television broadcasts etc. 10-13 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Asymmetric Information Asymmetric information refers to when one party in a transaction is in possession of more information than the other. In such cases, markets may not perform efficiently. Adverse selection – It occurs when sellers have incomplete information about customers. Moral hazard – It refers to inefficient actions induced by policy instruments that cause people not to bear the full consequences of their actions. 10-14 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Government Imperfections Market imperfections in many cases warrant government regulation. However, regulation can in some instances worsen the performance of markets. Additionally, regulation is not always intended to correct market imperfections. It can be the result of political forces to serve their own interests. 10-15 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Capture Theory The theory predicts that regulation initially will be found where there are market imperfections and over time will evolve to serve the interests of the regulated industry. Rent-Seeking Theory The theory insists that regulation is not established to address market imperfections but to benefit politically effective interests. 10-16 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Fairness Regulation is also used to accomplish fairness goals. Fairness can involve policies such as: Lifeline rates for telephone service for low-income people; Cases in which consumers do not or cannot easily take precautions. 10-17 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Other Public Purposes: Media Ownership Rules The Federal Communications Commission (FCC) has been concerned that concentrations of ownership in news media might stifle the full reporting of news or restrict the diversity of views expressed. The FCC has established rules that restrict the number and type of media outlets that could be owned by one company. 10-18 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Political Economy Theory The political economic theory views regulation as shaped by market imperfections, institutions and their officeholders, and the nonmarket action of private interests. The impact of nonmarket action on regulatory agencies can be direct, as well as indirect through the legislature or executive branch. 10-19 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall  Deregulation Due to technological changes, regulators at the federal level have actively worked for deregulation in the airline, electric power, and telecommunications industries. In Canada, both Air Canada and Petro-Canada were privatized in 1989 and 1991 introducing deregulation and privatization in the airline and oil industries. 10-20 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall