Regulation

1
Regulation

• Chapter 9 Section 2

2
Objectives

• What are the two principal ways of regulating a
  natural monopoly?
• How does the public choice theory of regulation
  differ from the capture theory of regulation?

3

• REGULATION
• A principle, rule, or law designed to control or
  govern behavior
• What regulations must you abide by in our school?
• How do they shape or change behavior?

4
SOCIAL REGULATION

• Concerned with the working conditions during the
  production of goods and services
• Concerned with the safety for consumers

5
How do consumers deal with unscrupulous business
owners?

• Consumer Rights Law
• Better Business Bureau
• Arbitrate
• Litigation
• Small Claims Court (lt5,000)

6
Ways to Regulate a Natural Monopoly

• 1 Price Regulation
• Government groups set the price that the natural
  monopoly can charge
• 2 Profit Regulation
• Regulators set the rate of profit that the
  natural monopoly can earn

7

• There are two principal theories that explain why
  regulators might not act in the best interest of
  the consumer.
• 1. Capture Theory of Regulation
• 2. Public Choice Theory of Regulation

8
Capture Theory of Regulation

• Eventually the regulated firm will capture and
  control the regulatory body
• Advise, expertise, retirement

9
Public Choice Theoryof Regulation

• The public confidence in the regulator resides in
  the size, strength, growth, and/or frequency of
  regulation.
• If the regulation agency increases in size and
  budget, it is viewed differently by the public
  than a shrinking agency.

10
Assessment

• What are the two principal ways of regulating a
  natural monopoly?
• How does the public choice theory of regulation
  differ from the capture theory of regulation?