Regulation

Governments are also able to control the behaviour of private firms through regulation. Regulation involves legislation to restrict the behaviour of firms and other organisations, and to set standards of operation or impose conditions on their activities.

Areas in which regulation is common:

  • Health and safety standards, such as safety at work.
  • Granting licenses to control the sale of potentially harmful products.
  • Consumer protection legislation, to set minimum accepted levels of behaviour, and terms and conditions of supply.
  • Protection of employees to ensure that they are not exploited, and receive minimum standards of welfare and pay.

  • Setting controls on emission levels.

  • Completely banning products (prohibition) if they are considered harmful to health or wellbeing – such as illegal drugs, dangerous weapons, and unauthorised pharmaceutical and medical products and medical procedures.

  • Controlling the abuse of monopoly power through competition policy - which may include controlling mergers, restricting anti-competitive behaviour, and opening up natural monopolies to competition.

  • Regulating the privatised industries. In the UK, as with the majority of advanced economies, special regulators are appointed to regulate each privatised utility, including energy, water and transport - many of which are natural monopolies.

Advantages and disadvantages of regulation

Advantages

    Regulation provides a number of benefits, such as:

  1. Helping achieve the socially desirable quantity and quality of output of goods and services, such as through price capping.

  2. Providing a ‘light touch’ alternative to nationalisation.

  3. Regulations can be updated to reflect new evidence and new theories, as well as deal with emerging problems, such as global warming, and the CODID-19 pandemic.

  4. Regulations can also be updated to reflect the evolving needs of consumers.

  5. 'Surrogate’ competition can also be introduced where no real competition exists – such as setting pricing formulae for energy companies who effectively may be natural monopolies.

Disadvantages

    Regulation also has several disadvantages, including:

  1. Government decisions may suffer from information failure, which may include setting inappropriate targets or overly strict regulations.
  2. Regulations may inhibit innovation and stifle entrepreneurship.

  3. Intervention may create unintended consequences, such as regulations regarding the production of medicines, which may create barriers to entry and protect existing pharmaceutical companies.

  4. Regulation may require a complex and costly legal system in order to implement the regulations, and make judgments if they are broken.

  5. Firms may also incur additional costs in terms of compliance.

  6. Regulators may also be subject to political bias, which can distort their judgment.

  7. Finally, regulators can suffer from regulatory capture, where those that are being regulated - such as the large energy companies - are able to 'win-over' regulators, who then adopt a more 'friendly' and less thorough approach to regulation.



Moral hazard

How can firms suffer from moral hazard?

Moral hazard
Government failure

Why do governments fail?

Government failure
Privatisation

What are the benefits of provatisation?

Privatisation