Regulation and deregulation

• What is regulation?

  • Regulation is the process of monitoring and enforcing laws to limit the harm caused by the external costs of consumption or production
• Why do governments create rules?

  Governments create rules to limit harm from negative externalities of consumption/production and to create competitive markets
• What do regulatory agencies do and how many regulators are there in the UK?

  • Regulatory agencies monitor that the rules are not broken
  • There are more than 90 regulators in the UK
  • Individuals or firms may be fined/imprisoned for breaking the rules
  • Industries such as water, telecoms, energy and the financial sector are regulated
  • Examples of some industry regulators include Ofgem (Energy), Ofwat (Water) and the Financial Conduct Authority (Financial markets)
• What are the advantages of regulation?

  • May lower prices which increases consumer surplus
  • Individuals or firms may be fined/imprisoned for breaking the rules providing a disincentive to break the rules
  • E.g. Selling cigarettes to minors is a punishable offence
  • Fines can generate extra government revenue
  • Can reduce the external costs of demerit goods
  • Can lead to positive externalities
  • The minimum school leaving age means young people have to be in education or training until they turn 18
  • This results in a more skilled workforce
• What are the disadvantages of regulation?

  • Regulation can lead to unintended consequences and government failure 
  • High costs of enforcement/ administration of laws
  • Policing a compulsory recycling scheme would be difficult and expensive
  • Reduced profits of firms
  • May compromise innovation and cause dynamic inefficiency
  • Can act as a barrier to entry discouraging smaller businesses
  • Reduced competition
  • May create underground (illegal) markets which could generate even higher external costs on society
  • May lead to regulatory capture
• What is deregulation (give some examples)?

  • Deregulation is the process of removing government controls from markets to increase competition and efficiency of markets
  • Royal Mail had a legal monopoly on delivering parcels in the postal market. Following deregulation in 2006, other firms entered the postal market, increasing consumer choice and improving service
  • The energy industry was deregulated and privatised in the 1980's. As a result of increased competition, consumers had more choice, lower prices, increased innovation (smart meters) and overall better services 
• What are the advantages of deregulation?

  • In some markets, deregulation promotes contestability in markets allowing lower prices for consumers
  • Eg. In the airlines market, there are more low-cost airlines and in the telecom market, prices of telephone calls are falling
  • Increased competition can lead to greater efficiencies and lower costs of production
  • Reduces excessive bureaucratic costs of regulation
• What are the disadvantages of deregulation?

  • May create a private firm with monopoly power as smaller companies are unable to compete
  • Consumers may pay higher prices if the market is not regulated
  • Private firms have an incentive to cut costs and provide a lower quality of service
  • In the local bus market, deregulation often led to duplication of services and the problem of congestion
  • Local buses are an industry where more than one firms creates different kinds of problems
  • Deregulation of important industries, such as the airline industry, can lead to safety concerns
• What can regulation prevent?

  • Reasons for regulation include preventing exploitation of consumers, taking externalities into account, and reducing consumption of demerit goods
  • For example, certain classes of drugs (demerit goods) are prohibited in the UK
  • Collusion and cartels are banned by competition policy and regulated by the Competition and Markets Authority to prevent abuse of monopoly power