Producer Protection, Prior Market Structure and the Effects of Government Regulation
Producer Protection, Prior Market Structure and the Effects of Government Regulation
Assignment on Regulatory Economics
1/5/2012 INTRODUCTION
The direct economic regulation of business by independent government commissions has a one-hundred year history on the North American continent. It is generally asserted that the purpose of such commissions is to protect consumers from exploitation by limiting the economic powers of certain firms having pervasive effects on the public interest (for example, transportation companies and public utilities). . However, the findings of the relatively few em-pirical studies of the economic effects of regulation indicate that important differences actually do exist in these effects. The disparities in these findings raise the question of why the actual economic effects of regulation differ among industries despite the supposedly common, avowed purpose of regulation. They also question whether a single hypothesis is adequate to explain the diverse effects of regulation.
THREE HYPOTHESES REGARDING REGULATION
1. Consumer-Protection Hypothesis:
This is the most popular of existing hypotheses. It implies that regulation will protect consumer interests by reducing prices until they equal marginal costs, by preventing discriminatory pricing, by improving service quality (at existing prices), by encouraging the entry of firms that are more efficient or that offer more preferred price/product combinations, and by reducing industry profits to the market rate of return. , they often appear to promote the interests of regulated firms to the disadvantage of consumers. Despite the real purpose of regulation, the regulated industries have managed to pervert their regulators until the commissions become the protectors of the "regulated" rather than of consumers.
2. No-effect Hypothesis:
This hypothesis implies that regulation has no effect on regulated industries (other than to impose certain costs in the performance of
Assignment on Regulatory Economics
1/5/2012 INTRODUCTION
The direct economic regulation of business by independent government commissions has a one-hundred year history on the North American continent. It is generally asserted that the purpose of such commissions is to protect consumers from exploitation by limiting the economic powers of certain firms having pervasive effects on the public interest (for example, transportation companies and public utilities). . However, the findings of the relatively few em-pirical studies of the economic effects of regulation indicate that important differences actually do exist in these effects. The disparities in these findings raise the question of why the actual economic effects of regulation differ among industries despite the supposedly common, avowed purpose of regulation. They also question whether a single hypothesis is adequate to explain the diverse effects of regulation.
THREE HYPOTHESES REGARDING REGULATION
1. Consumer-Protection Hypothesis:
This is the most popular of existing hypotheses. It implies that regulation will protect consumer interests by reducing prices until they equal marginal costs, by preventing discriminatory pricing, by improving service quality (at existing prices), by encouraging the entry of firms that are more efficient or that offer more preferred price/product combinations, and by reducing industry profits to the market rate of return. , they often appear to promote the interests of regulated firms to the disadvantage of consumers. Despite the real purpose of regulation, the regulated industries have managed to pervert their regulators until the commissions become the protectors of the "regulated" rather than of consumers.
2. No-effect Hypothesis:
This hypothesis implies that regulation has no effect on regulated industries (other than to impose certain costs in the performance of