Arguments for Market Regulation Flashcards
What are negative externalities?
Unregulated markets fail to internalize external costs, leading to overproduction of harmful goods
Example: Pollution from industries
What is a market-based regulation aimed at correcting negative externalities?
Carbon taxes (Pigovian taxation) or cap-and-trade systems
Example: EU Emissions Trading Scheme
What historical event prompted the 1956 Clean Air Act in the UK?
The Great Smog of London (1952)
This event killed thousands due to unregulated coal burning
What contemporary example illustrates an effort to curb emissions?
China’s implementation of a carbon pricing system in 2021
China is the world’s largest polluter
What are critics’ concerns regarding China’s carbon pricing system?
Weak enforcement and firms evading strict compliance
What is regulatory capture?
When firms influence regulators to create favorable policies
This can be an unintended consequence of regulation
What is a potential risk of regulation addressing externalities?
Increased business costs leading to job losses
What are public goods?
Public goods are non-excludable and non-rivalrous
Why are public goods underprovided in a free market?
Firms lack profit incentives to supply them
How do governments ensure the provision of public goods?
Through taxation
What is an example of a public good in the UK?
The UK’s National Health Service (NHS)
What issue does the NHS address?
Market failure in healthcare provision
What problems have arisen from the underfunding of the NHS?
Long waiting times and declining service quality
What alternative approach to public goods provision is mentioned?
Germany’s social insurance model
What does Germany’s social insurance model combine?
Private provision with government-mandated coverage
What are some potential downsides of excessive state involvement in public goods provision?
Inefficiency, bureaucracy, and fiscal pressures
Fill in the blank: Public goods are _______ and _______.
non-excludable and non-rivalrous
True or False: Public goods can be provided profitably by private firms.
False
What fiscal pressure is mentioned regarding public goods in the UK?
Rising healthcare costs
What is the impact of market concentration?
Leads to price-gouging, reduced innovation, and consumer exploitation
Market concentration occurs when a small number of firms control a large share of the market.
What is the purpose of antitrust regulation?
Prevents firms from becoming too dominant
Antitrust laws are designed to promote competition and prevent monopolies.
What was the historical example of antitrust regulation in the US?
The 1890 Sherman Antitrust Act
This act was significant in breaking up monopolies like Standard Oil.
What was the outcome of the 2018 EU fine against Google?
Google was fined €4.3 billion for abusing its market dominance in mobile search
This action aimed to ensure fairer competition in the market.
What are potential downsides of excessive regulation?
Can stifle economies of scale, reduce incentives for innovation, and create regulatory uncertainty
Balancing regulation is crucial to foster a healthy business environment.
What is asymmetric information?
Consumers often lack full knowledge about products
This can include financial products and food safety.
What role does regulation play in asymmetric information?
Regulation ensures transparency
This aims to provide consumers with better knowledge about products.
What was the purpose of the 2010 Dodd-Frank Act in the US?
To increase financial market transparency after the 2008 financial crisis
This act was a response to the issues revealed during the crisis.
What alternative approach do some advocate instead of strict regulation?
Consumer education
This perspective suggests that education empowers consumers rather than imposing regulations.
True or False: Excessive regulation can slow down economic activity.
True
Excessive bureaucracy may limit consumer choice and market dynamism.
What is a potential downside of regulation in the context of asymmetric information?
It can slow down economic activity and limit consumer choice
This is a concern raised by critics of too much regulation.
Fill in the blank: Regulation increases consumer _______.
trust
This trust is crucial for a functioning market.
What is the primary goal of government oversight in consumer protection?
To ensure product safety, prevent fraud, and mandate truth in advertising.
What agency was established in the UK after the 1996 BSE crisis?
Food Standards Agency (FSA)
What contemporary issue highlights the need for digital consumer protection?
Social media influencers promoting unregulated financial schemes (e.g., crypto scams)
True or False: Excessive regulation in consumer protection can discourage small businesses.
True
Fill in the blank: The UK’s Food Standards Agency was established to restore public confidence in _______.
food safety
What is a potential negative effect of excessive regulation on consumers?
It can raise costs for consumers.
What do Labour Protection Regulations prevent?
Worker exploitation and ensure fair wages and safe working conditions
These regulations are designed to protect the rights and wellbeing of workers in various industries.
What historical legislation limited child labor in the UK?
The Factory Acts (19th century)
These acts were significant in improving working conditions during the industrial revolution.
What is the purpose of the UK’s 2016 Modern Slavery Act?
To combat forced labor in supply chains
The Act aims to increase transparency and accountability in businesses regarding labor practices.
What issue was highlighted by the Boohoo sweatshop scandal in 2020?
Weak enforcement of labor regulations
The scandal revealed significant issues with labor conditions despite existing regulations.
What is a potential negative effect of overly strict labour regulations?
Reduction in employment due to increased business costs
High minimum wages and strict rules can lead businesses to hire fewer workers.
What often precedes economic crises?
Financial deregulation
Financial deregulation can lead to instability in the economy.
What is the role of regulations in the financial sector?
Ensure stability
Regulations are designed to create a stable financial environment.
What crisis resulted from lax oversight of subprime mortgage lending?
2008 global financial crisis
The 2008 crisis was a significant event that highlighted the dangers of insufficient regulation.
What was a response to the 2008 financial crisis?
Basel III capital requirements
Basel III aimed to prevent excessive risk-taking by financial institutions.
What alternative view exists regarding financial regulation?
Overregulation can limit credit availability and slow economic growth
Some believe that too many restrictions can hinder economic progress.
What must financial regulation balance?
Stability with financial market efficiency
Effective regulation should not compromise the efficiency of financial markets.
What is moral hazard in the context of firms and bailouts?
Firms may take excessive risks if they believe they will be bailed out
How does regulation relate to moral hazard?
Regulation prevents firms from taking excessive risks due to the expectation of bailouts
What was a significant example of a government bailout in 2008?
The UK government’s bailout of RBS and Lloyds Bank
What criticism arose from the 2008 UK government bailout?
It led to criticism of moral hazard
What is an alternative approach to bailouts?
‘Bail-ins’ where investors bear the cost of financial failures instead of taxpayers
What are the potential consequences of bailouts for firms?
They create perverse incentives for firms to take reckless risks
True or False: Bailouts protect economies but do not affect firm behavior.
False
Fill in the blank: Regulation prevents excessive risks by firms due to the expectation of _______.
bailouts
What is the main evaluation point regarding bailouts?
While they protect economies, they encourage reckless firm behavior
What do market economies create and what issue do they also widen?
Wealth and inequalities
How does regulation help in wealth redistribution?
Through taxation and social programs
What is an example of a system that funds public services through taxation?
The UK’s progressive tax system
What limits the effectiveness of the UK’s progressive tax system?
Tax avoidance by multinational corporations
Name two multinational corporations mentioned that engage in tax avoidance.
- Amazon
What do critics argue excessive taxation reduces?
Incentives for investment and economic growth
What are the two main effects of redistribution mentioned?
- Reduces poverty
- May drive capital flight
True or False: Overly high taxes can discourage entrepreneurship.
True
Fill in the blank: Regulation helps redistribute wealth through _______.
[taxation and social programs]
What is the main argument of Joseph Stiglitz regarding free markets?
Free markets are inefficient when information is imperfect.
This highlights the need for intervention to address market failures.
What is a key idea presented by Stiglitz about market failures?
Market failures, especially in financial markets, require strong oversight to prevent crises.
This suggests that without oversight, markets can lead to significant economic issues.
What example does Stiglitz provide to support his argument?
Advocated for stronger financial regulations post-2008 to prevent reckless lending and speculation.
This example underscores the necessity of regulatory measures following financial crises.
True or False: According to Stiglitz, markets can always produce efficient and fair outcomes.
False.
Stiglitz emphasizes that markets often fail without proper regulation.
Fill in the blank: ‘Markets, by themselves, often fail to produce _______ or fair outcomes.’
[efficient]
This quote from Stiglitz encapsulates his view on market limitations.
What is the primary purpose of market regulation?
To correct failures, protect consumers, and ensure stability
Market regulation aims to address issues that arise in unregulated markets, such as monopolies and information asymmetry.
What are potential downsides of poorly designed market regulation?
Inefficiency, excessive costs, and reduced competition
Poor regulation can lead to market distortions that harm rather than help economic conditions.
Why is a dynamic balance between state intervention and free market mechanisms important?
To ensure economic growth alongside social welfare
Striking this balance helps maintain a healthy economy while also addressing the needs of society.
Fill in the blank: Market regulation must be carefully designed to avoid _______.
[inefficiency, excessive costs, and reduced competition]
True or False: Market regulation is unnecessary if a market is functioning efficiently.
False
Even efficient markets can experience failures that require regulation to correct.
