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Government Regulation, Laws and the Market Price

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178CHAPTER 11Government Regulation, Laws, and the Market Price(draft)Government RegulationIn this chapter, regulation will be defined as a processconsisting of the intentional restriction of a subject's choiceof activity, by an entity not directly party to or involved inthat activity. In stating this, there are a number of pointsthat need to be made. First, regulation is a process, that is itis an ongoing, continuous activity. Therefore if we are going totalk about regulation of a particular market, the enterprises inthe market must continually come to the market to sell theirgoods and enterprises/individuals must continually come to themarket and buy the goods. Hence we must not only view theregulated enterprises as going concerns, but the economy itselfmust be seen as evolving through time. Secondly, regulation isan intentional restriction of a subject's choice of activity. There are three aspects to this. First there are regulatory goalssuch as stabilizing the market, preventing destructivecompetition, the continuation of the enterprises involved, etc;second, these goals are achieved by constraining the activitiesof the enterprises in the market and/or the enterprises thatwould like to enter the market - in fact, if the regulatorycommission deals with competing markets/enterprises, constraintsmight be placed on enterprises in both markets in order toachieve the desired goals; and lastly, the restraining activitiescan change/evolve over time to meet new conditions while the179goals remain constant. Thirdly, since regulation is a processthrough time, the goals it adopted at one point in time might bechanged at a future point in time. As a result the constrainingactivities might also change to accommodate the new goals. Finally, the party directing the activity can be private (cartelsfor example) or public; and the public party can be a countynational government agency or commission. In this chapter weshall primarily be concerned with government commissions and'agencies' (such as Parliament and the Courts' involvement inresale price maintenance).There a number of explanations for the origin of governmentregulation of industry, but we will be concerned with only theprivate interest explanations. Before discussing the privateinterest explanations, let us first briefly discuss the publicinterest explanations. Public interest theories of regulationassume that regulation is established largely in response topublic-interest-related objectives. Unless one assumes that thestate or public mystically acts for itself in seeking theregulation, public interest theories require, in effect, thatparties seeking regulation be agents for the public interest. These agents may satisfy their self-interest instrumentallythrough pursuit of public interest objectives, but the theoryrequires that at least some preferences for the public interestbe genuine and terminal. The form which public interest takes inthese theories are as follows: (a) balancing concept in which the public interest results fromthe simultaneous satisfaction of selected aspects of several180different particularistic interests. The balancing resultgives satisfaction to interests that may to some extent becontending or competing. (b) compromising concept in which particularistic interests aremade to concede part of what they desire so that the overallresult is in the public interest.(c) trade-off concept in which particularistic interestsaffected by regulation are made to provide some costlyservice or other benefit judged to be in the public interestin exchange for certain private benefits to them.(d) an overriding national or social goals concept in whichcertain social, societal, or national objectives are held tobe in the public interest and supersede private interests.(e) particularistic, paternalistic, or personal dictatedconcept, unitary in character, in which the public interestis equated with the preferences of a particular person,group or organization, or system.There are many different public interest theories of theorigin of regulation but they will not be discussed here. Ratherwhat needs to be noted is the general argument that lies behindthem. The argument is based on two assumptions, that the economy(market) is very fragile and therefore can easily operate in amanner which is not in the public interest, and that regulationis costless and does not make matters worse. With theseassumptions, it is easy to argue that regulation is simply aresponse of government to public demands to correct the problemsin the market and that the government can in fact make conditions181better. However there are many problems with this argument -some lying the assumptions and others with the notion ofresponding to public interest; but the principle problem which weshall be concerned with is that in many cases industries asked tobe regulated rather than have regulation imposed on them.Private interest explanations of the origin of regulationare based on the assumption that enterprises in a market activelyseek government regulation in order to achieve a goal or a rangeof goals particular to them. In general it is argued that theprimary goal sought by the enterprises is the maximization ofprofits and the method sought to achieve it is the use ofgovernment regulation to control entry, to affect competingcommodities and services, to fix prices, and to grant subsidies. The first three methods are desired because of the 'free rider'problem. That is, enterprises request regulation because thereis no legal way to make all the enterprises in the market conformto a common goal such as setting the same market price. Rather,because of the lack of legal control, enterprises are able toengage in one-up-manship and thus plunge the market into chaos. Therefore legal assistance is sought to prevent this and thus, atthe same time, maximize (long or short term) profits.The problem with the above explanations is that theyattribute the origins of government regulation to greed - that isto the desire of enterprises to simply maximize profits. However, the notion of profit maximization cannot be sustainedtheoretically in a sequential production framework. Rather, theenterprise is interested in growing (expanding) and therefore182will engage in activities which will promote it. Hence it willrequest government regulation if it believes that is the only wayto maintain itself as a going concern. Specifically, it will beargued in this course that


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