1.4.5 Regulation Flashcards
Regulation
Rules which are enforced by the government.
They are usually backed up with legislation (i.e. laws), which means legal action can be taken against those that break the rules.
They can be used to control the activities of producers and consumers and try to change their undesirable behaviour.
Why is regulation used?
Regulation is in place to remove negative externalities (impacts on society).
The aim is to move the market equilibrium closer to the socially optimum equilibrium.
What happens if firms/individuals fail to follow regulations?
They can be punished, often through fines.
Examples of how regulation is used to correct market failure
- Reducing the use of demerit goods and services (e.g. by limiting the advertising of cigarettes)
- Reducing the power of monopolies (e.g. Ofgem setting price caps)
- Providing some protection for consumers and producers from problems arising from asymmetric information (e.g. Consumer Rights Act protects consumers against firms supplying substandard goods)
Issues with setting regulation
- It can be difficult for a government to work out what is ”correct”. For example, a government might set the level of acceptable pollution by firms too low or too high.
- There’s a need for regulation in some areas to be worldwide rather than in just one country. – E.g. Regulations on greenhouse gas emissions would be more effective if it were enforced worldwide.
- Monitoring compliance with regulations can be expensive for a government, and if the punishment for breaking the regulations isn’t harsh enough, they might not be a deterrent and change behaviours.
Examples of regulation
- Drink drive limit
- Speed limits
- Building regulations
- Energy Performance Certificates (EU law), which informs consumers and encourages firms to invest in better technology.
- Smoking in cars
Benefits of regulation
- Targeted and specific - Individual circumstances can be analysed, and appropriate action taken.
- Easily understood by firms – Not likely to lead to disputes when firms break limits, as there are clear boundaries.
- Protects third parties and/or the environment.
Issues with regulation
- Inspectors need to be employed to enforce at a cost. E.g. traffic wardens to catch people breaking the regulations.
- Investigations can be expensive, time consuming and only deal with a fraction of the cases.
- The external cost needs to be measurable, which can be difficult. – How far away is the market equilibrium to the socially optimum equilibrium?
- Regulation may have unintended consequences with impact upon people who are not creating external costs.
- The potential fines for breaking the regulations may not be much of a deterrent.
Evaluation of regulation
- How do you judge where the socially optimum equilibrium is?
- Clarity – How clear are the regulations to follow?
- Implementation – Does it cost money to implement this regulation?
- Level of fines – How much is the fine? Is this too much or too little?
Hoy No Circula!
[Example of regulation]
Mexico City introduced the ‘Hoy No Circula!’ (car doesn’t drive today). This policy works to discourage car travel. Certain cars are banned on certain days of the week (based on the car’s number plate). Public transport is encouraged and the city is opening up new bus rapid transit lines.
Evaluation of ‘Hoy No Circula!’
[Example of regulation]
This policy was effective – it caused vehicle emissions to be reduced by 15%. Mexico City is now no longer ranked as the most polluted city (as it was declared by the UN in 1992). Although driving is considered to be a status symbol in the city, there was good compliance from residents.
Evaluation:
- Although most people did comply with the regulations, many people simply bought another car, which they could drive on that other day.
- Car pooling was encouraged (could be argued as a good thing as it is still fewer cars on the road, however it isn’t as good as using public transport).
- Data from the university of California shows there isn’t any evidence that air quality had improved. Has Mexico City actually reduced air pollution or has it just been overtaken by Beijing and Delhi?
