Government Regulation
Economics: Edexcel A A Level, topic 6.3.6
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.
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.
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.
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.
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.
Test yourself on Government Regulation
Which of the following are benefits of regulation?
Which of the following is a disadvantage of regulation?