Government intervention in econo9mic activity using:

-Commands

-Controls

-Incentives

Populist era – 

late 1880’s – farmers regulation rates

* Progressive era and the New Deal – 

late 1930’s – 1940’s – industries

* Social regulation 

1960’s –1970’s – safety, health, & environment

* Economic deregulation – 

intended to reduce prices

Constitutional Basis for Regulation

Section 8 of Article 1 gives Congress the power to regulate commerce among the several states.

5^th Amendment – due process

14^th Amendment – applies the due process requirements to the states

Independent Commissions

Executive Branch Agencies

Administrative Procedure Act (1946)

APA requires notice and

Actions must not be arbitrary

Capricious, or

An abuse of discretion

Rulemaking is the most important activity of most regulatory agencies.

These agencies are influenced by the executive branch via appointments and congress via budgetary and oversight authorities.

Courts influence regulation via review of regulatory actions for constitutionality and for consistency with statutes.

Explanations for Regulation

Market imperfections theory predicts that regulation will be instituted to improve economic efficiency by correcting imperfections.

Political theory predicts that interest groups seek regulation to serve their interests.

Market Imperfections

natural monopoly

externalities

pecuniary

nonpecuniary

public good

asymmetric Information

Moral Hazard

one firm can produce a given set of goods at a lower cost than can any large number of firms.

actions of one affects others through changes in prices of goods and services.  New plant, wages increase, supply and demand.  Does not provide a rationale for regulation.

actions of one affects the preferences or production opportunities of others.  Autos, pollution.  Divergence of private costs from social costs.  Does provide a rationale for regulation.

consumption by one does not reduce its availability for others.  Apple vs. National Defense.  Preferences affect goods.

one has different (private) information at the time they act.  Used car example.  Liability is an alternative to regulation.-Let the people sue eachother

behavior induced when people do not bear the full consequences of their actions.  Insurance.  Controlled by structuring incentives to take into account in decision making.  Co-pays.

“…in regulating, the cure may be worse than the disease…”

- if industry controlled itself it could be better

1) Economic regulation is initially imposed to adress market imperfections...Regulaters begin to see problems as their own... Over time it will evolve to serve the interests of the regulated industry.

2) Regulation is supplied in response to the demands of interest groups 

3)Regulation is shaped by the efficiency consequences of policy alternatives and the policy responses to those consequences.... Regulatory policy is a product of interest group actions and institutions.