LS18 - Limits to Government Intervention

Question 1

Regulatory capture

Answer 1

An economic theory that says regulatory agencies may come to be dominated by the industries or interests they are charged with regulating.

Question 2

Causes of regulatory capture

Answer 2

• bribery
• familiarity
• revolving door

Question 3

Bribery

Answer 3

• government officials are motivated by financial rewards
• e.g. a housing company seeking approval for a property development may be tempted to bribe the regulator in charge of granting access

Question 4

Familiarity

Answer 4

• governments often work closely with members of firms they regulate
• overtime, they may become friendly towards each other leading to bias
• UK regulators of the audit industry have been accused of this

Question 5

Revolving door

Answer 5

• regulators often go on to work for companies they previously regulated and are often paid large salaries e.g. George Osborn paid nearly 800k by Blackrock
• jobs may be rewarded due to lenient treatment during regulation

Question 6

Impacts of regulatory capture

Answer 6

• quality falls
• price may rise
• externalities
• asymmetric information due to e.g. false audit

Question 7

How is quality impacted by regulatory capture?

Answer 7

If regulators do not enforce minimum quality standards, the quality is likely to fall e.g. increased delays in the rail industry

Question 8

How is price impacted by regulatory capture?

Answer 8

• price is likely to be higher - for natural monopolies, this means regulators may be generous when setting permitted price rises e.g. RPI + 3% instead of RPI + 2%
• may have a regressive effect

Question 9

How does regulatory capture lead to external costs?

Answer 9

• external costs are likely to be ignored if regulators have been captured e.g. hygiene standards for a restaurant
• this could result in food poisoning thus causing people to miss work and increasing costs for public health care