Regulation is the use of legal intervention to force consumers and producers to behave in certain ways. It is the use of government legislation in order to produce a more desirable economic outcome than that achieved by the free market.
Economists generally do not favour the use of government regulation. It is seen as a 'blunt' instrument. It forces consumers and producers to do (or not to do) certain things rather than to provide incentives. It can be seen as working against the market rather than with the market. However, governments may judge that regulation is sometimes required if a more desirable outcome is to be achieved.
Government regulation may be used in order to control the behaviour of monopolies. There are several forms of regulation that can be used for this:- Legislation that outlaws the formation of monopolies.
This is usually referred to as merger policy. It takes the view that the formation of a monopoly in a market may be undesirable and thus, under some circumstances, mergers that would create a monopoly would not be allowed to occur.
- Legislation that forbids certain types of monopoly behaviour.
An example might be 'predatory pricing'. This is the practice of a powerful producer deliberately setting its price below the cost of production. It does this in order to try to destroy competition. Either a current firm is to be driven out of business or a potential new firm is dissuaded from entering the market. It thus maintains or strengthens the monopolist's position and can lead to inefficiency.
- Laws that insist on certain standards of provision.
- Regulations that insist on certain levels of competition in an industry.
Government regulation can be used in other areas to try to overcome market failures. An Important possibility is their use to try to tackle environmental problems. A common approach suggested by economists is to use taxes to tackle negative externalities that lead to excessive environmental costs and to give subsidies to encourage environmentally friendly production techniques. However, a more direct approach is simply to legislate and outlaw certain behaviours that create environmental damage.
Laws may be passed by governments that disallow certain types of pollution. Any producers found to contravene such laws are prosecuted and thus pollution is reduced. Laws are seen as necessary in some situations to stop the excessive depletion of natural resources. There is no marginal cost for the using up of scarce resources such as pasture by cattle herders. A similar situation can be seen with the over-fishing of fish stocks. Without regulation fishing stocks may become dangerously depleted.
Resource: As Level and A Level Economics, Colin Bamford, Keith Brunskill, Gordeon Cain, Sue Grant, Stephen Munday, Stephen Walton, University of Cambridge, 2002
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