6.3.6

Government Regulation

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Regulation and Deregulation

Regulation involves setting rules that firms must comply with. These rules are imposed by the government to try and correct market failures. Deregulation is a loosening of these rules.

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Benefits of regulation

  • Regulation can correct market failures that arise from externalities.
    • E.g regulation can be imposed to limit the level of pollution firms make.
  • Regulation can control monopolies and stop them from taking advantage of customers and reducing welfare.
  • Legislation provides a means of punishing firms for their anti-competitive behaviour.
  • Regulation can be used to protect the environment.
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Costs of regulation

  • It's hard to know which industries to regulate, and how to regulate them. This often needs a value judgement.
    • E.g what level does the government set for firm pollution? Why that particular level?
  • It can be expensive to monitor firms to enforce regulation, and there is an opportunity cost attached to this.
  • It can be expensive to follow regulations. Some firms may end up closing down or relocating because of high costs.
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Benefits of deregulation

  • The allocation of resources will improve as the government will reduce their interference with the free market.
  • By reducing the bureaucracy associated with legislation, efficiency will improve.
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Costs of deregulation

  • Customers are no longer protected from the anti-competitive behaviour of firms and might lose out.
  • There are some market failures it cannot fix, such as the problem with externalities.
    • E.g deregulation of industries may lead to an increase in pollution because of the tragedy of the commons.
  • Some natural monopolies need regulation.
    • E.g sewage services.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

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