INTEREST-GROUP THEORIES OF REGULATION

So far we have been looking at the normative publishes interest justifications for government regulation. Te should recognize, however, that regulation creates profits and. thereby produces interest groups which have vested interests in the regulatory outcomes. Sometimes, because of the interaction between regulation and politics, regulation has the perverse result of restricting entry into the regulated industry, which actually raises and Profits for established companies.’ Hence, a regulated industry may lobby in favor of continued regulation, in order to keep out competitors and keep profits high. Economists who emphasize the anti competitive aspect of regulation make the following argument.

The historical record shows that there is much truth to this view.For example. numerous economic studies have shown that regulation often keeps prices high. For many years, trucking companies and airlines had to get permission before lowering prices or entering new markets. Other types .of regulation also have the effect of limiting competition. For example, high standards for new drugs mean that the process’ of getting regulatory approval is lengthy and expensive. That keeps out many smaller companies which cannot afford the years of testing that a new drug requires.

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