Regulation w/market failure

• Regulation


  A rule of law enacted by the government that must be followed by economic agents to encourage a change in their behavior
• Regulation


  • It is a non market-based approach to solving market failure
  • It doesn't work through the price mechanism like indirect taxes and subsidies do
• Regulation doesn't have the same problems as indirect taxes and subsidies, namely the dependence on price elasticity of demand
• Regulation


  A command-and-control approach to solving market failure
• Types of commands/rules in regulation

  • Bans (e.g. public smoking ban)
  • Age limits (e.g. on buying cigarettes and alcohol)
  • Time limits (e.g. on when alcohol can be served)
  • Caps (e.g. emissions caps, fishing quotas)
  • Compulsory requirements (e.g. graphic imagery on cigarette packets, compulsory vaccination)
  • Innovative regulations (e.g. deposit recycling schemes, road space rationing)
• Regulation


  • Needs strong enforcement to ensure compliance
  • Needs effective punishment (e.g. fines, bans, jail terms) to incentivise compliance
• If the command and control aspects of regulation are strong

  The incentive is for economic agents to change their behavior to move quantity towards the socially optimum level
• The end result of effective regulation is negative efficiency but a welfare gain
• Regulation


  • It is costly to administer and enforce
  • The command may be set too strict or too lax, leading to unintended consequences
  • It can be unfair/inequitable, especially for firms with different abilities to comply
  • It is a very paternalistic and dominating policy, reducing freedom of choice
• The risk of government failure with regulation is very high