6) Legislation and Regulation - MB

Question 1

define legislation…

Answer 1

laws created by government to enforce regulations

Question 2

define regulation…

Answer 2

rules created by government to control activities of producers and consumers by changing their behaviour (eg alcohol when driving)

Question 3

define prohibition…

Answer 3

an attempt to prevent the consumption of a demerit good by declaring it illegal (aka banned), eg smoking indoors

Question 4

examples of legislation:
what is the Consumer Rights Act (2015)?

Answer 4

legislation that regulates the quality of goods by protecting consumers from producers selling substandard goods

Question 5

examples of legislation:
what is the Environmental Protection Act (1990)?

Answer 5

legislation that limits the damage caused to the environment by regulating waste management and emissions into the environment

Question 6

examples of legislation:
what is ESG?

Answer 6

(Environmental, Social and Governance), a suite of laws encouraging ‘better’ behaviour by firms

Question 7

regulations influence…for, or… of, a good

Answer 7

1) demand
2) Supply

Question 8

regulations often restrict the sale of…

Answer 8

demerit goods

Question 9

how can regulations offer producer and consumer protection?

Answer 9

protect them from asymmetric information, increasing equality of access ( this can arise when buying goods and taking advice from an expert)

Question 10

regulations can set…. environmental…

Answer 10

• minimum environmental standards

Question 11

price controls are…

Answer 11

regulations, but economists consider them separately

Question 12

legislation can ban (prohibit) the sale of…, by…

Answer 12

the sale of demerit goods, by declaring these goods illegal

Question 13

how can legislation threaten firms?

Answer 13

legislation may threaten fines to firms or even prison to employees of firms that fail to ensure regulations are met

Question 14

how can legislation threaten consumers?

Answer 14

legislation may threaten prison to consumers that buy and/or consume prohibited goods

Question 15

what are the two advantages of legislation and regulation?

Answer 15

1) regulations are cheap to create
2) regulations can be self-funding

Question 16

how can regulations be cheap to create?

Answer 16

the cost of creating and imposing a regulation is low; existing infrastructure such as police, courts and prisons can enforce regulations

Question 17

how can regulations be self-funding?

Answer 17

the fines imposed on those that break rules can be used to pay for enforcement

Question 18

what are the four disadvantages of legislation and regulation?

Answer 18

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

Question 19

what are 4 things regulations can do?

Answer 19

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

Question 20

what are 3 things legislation can do?

Answer 20

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

Question 21

how can regulations be difficult to set?

Answer 21

it can be difficult for a government to work out the correct strength of a regulation; regulations may be too weak or too strong

Question 22

how can regulations increase firms’ costs?

Answer 22

firms may have to employ expensive expert advice to understand the impact of a regulation, or choose to move country to avoid it

Question 23

how can regulations be expensive to enforce?

Answer 23

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

Question 24

how may regulations require international agreement?

Answer 24

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

Question 25

why does regulation compare favourably to tax? (2 things)

Answer 25

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

Question 26

why does regulation compare unfavourably to tax? (2 things)

Answer 26

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

Question 27

Analysis: what is the effect of prohibition to the S curve?

Answer 27

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

Question 28

Analysis: what is the effect of prohibition on P?

Answer 28

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

Question 29

Analysis: What is the point of prohibition?

Answer 29

Prohibition is a way of legislating against demerit goods that cause harm to society

Question 30

Analysis: why legislate against demerit goods?

Answer 30

The social costs of consumption are higher than the private costs of consumption; there is an external cost caused by negative externalities

Question 31

Analysis: how does legislation through prohibition reduce inequity?

Answer 31

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

Question 32

Analysis: why prohibition rather than regulation?

Answer 32

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