6) Legislation and Regulation - MB Flashcards
define legislation…
laws created by government to enforce regulations
define regulation…
rules created by government to control activities of producers and consumers by changing their behaviour (eg alcohol when driving)
define prohibition…
an attempt to prevent the consumption of a demerit good by declaring it illegal (aka banned), eg smoking indoors
examples of legislation:
what is the Consumer Rights Act (2015)?
legislation that regulates the quality of goods by protecting consumers from producers selling substandard goods
examples of legislation:
what is the Environmental Protection Act (1990)?
legislation that limits the damage caused to the environment by regulating waste management and emissions into the environment
examples of legislation:
what is ESG?
(Environmental, Social and Governance), a suite of laws encouraging ‘better’ behaviour by firms
regulations influence…for, or… of, a good
1) demand
2) Supply
regulations often restrict the sale of…
demerit goods
how can regulations offer producer and consumer protection?
protect them from asymmetric information, increasing equality of access ( this can arise when buying goods and taking advice from an expert)
regulations can set…. environmental…
- minimum environmental standards
price controls are…
regulations, but economists consider them separately
legislation can ban (prohibit) the sale of…, by…
the sale of demerit goods, by declaring these goods illegal
how can legislation threaten firms?
legislation may threaten fines to firms or even prison to employees of firms that fail to ensure regulations are met
how can legislation threaten consumers?
legislation may threaten prison to consumers that buy and/or consume prohibited goods
what are the two advantages of legislation and regulation?
1) regulations are cheap to create
2) regulations can be self-funding
how can regulations be cheap to create?
the cost of creating and imposing a regulation is low; existing infrastructure such as police, courts and prisons can enforce regulations
how can regulations be self-funding?
the fines imposed on those that break rules can be used to pay for enforcement
what are the four disadvantages of legislation and regulation?
1) regulations can be difficult to set
2) regulations increases firms’ costs
3) regulations can be expensive to enforce
4) regulations may require international agreement
what are 4 things regulations can do?
1) influence demand for, or supply of, a good
2) often restrict the sale of demerit goods
3) can offer producer and consumers protection from asymmetric information, increasing equality of access, this can arise when: buying goods and taking advice from an expert
4) can set minimum environmental standards
what are 3 things legislation can do?
1) can ban the sale of demerit goods, declaring the goods illegal
2) may threaten fines to firms or even prison to employees of firms that fail to ensure regulations are met
3) may threaten prison to consumers that buy and/or consume prohibited goods
how can regulations be difficult to set?
it can be difficult for a government to work out the correct strength of a regulation; regulations may be too weak or too strong
how can regulations increase firms’ costs?
firms may have to employ expensive expert advice to understand the impact of a regulation, or choose to move country to avoid it
how can regulations be expensive to enforce?
monitoring compliance of regulations can involve the creation of quangos employing (exepensive) experts in the field, and may need expensive experts action to prove that regulations were broken
how may regulations require international agreement?
for businesses to create negative externalities that affect multiple countries or the whole world, such as greenhouse gases, international agreement may be required to be fully effective
why does regulation compare favourably to tax? (2 things)
1) if the allocatively efficient level of consumption is zero, it is more effective to prohibit consumption to achieve this than set a tax at the level that leads to zero
2) if the behaviour government wants to discourage does not have a price on it, a tax cannot change behaviour. To be successful, regulation does not require a market to pre-exist, unlike a tax
why does regulation compare unfavourably to tax? (2 things)
1) taxes raise more revenue for government than regulation because the costs of enforcing a regulation are much higher, and taxes tend to raise more revenue than fines from regulations
2) the costs imposed upon business of a tax are easier to measure and understand, whereas the cost of a regulation is more difficult to predict, especially when the expertise is difficult to obtain
Analysis: what is the effect of prohibition to the S curve?
The effect of prohibition is to threaten legal consequences leading to most suppliers creating production and so the supply curve shifts to the left from S0 to S1
Analysis: what is the effect of prohibition on P?
The supply curve shifts left, this leads to lower consumption, which falls from Q0 to Q1, at a higher price, would rises grub P0 to P1
Analysis: What is the point of prohibition?
Prohibition is a way of legislating against demerit goods that cause harm to society
Analysis: why legislate against demerit goods?
The social costs of consumption are higher than the private costs of consumption; there is an external cost caused by negative externalities
Analysis: how does legislation through prohibition reduce inequity?
The consumers themselves may not be aware of, or underestimate, the negative consequences to themselves of consumption - therefore the legislation reduces inequity by protecting the poorest from themselves
Analysis: why prohibition rather than regulation?
Prohibition, rather than regulation, exists when the allocatively efficient level of consumption is zero; there are no circumstances where society is made better off by consumption
