Interest Theory as Economic Theory - Essay Example

GRОUР АSSIGNMЕNT Student’s Name: Course Code: Tutor’s Name: Date of Submission Executive summary This report analyzes interest theory and the role of regulators who are politicians in this case. The paper looks at interest theory as an economic theory and how the regulation is facilitated according to the demand of the general public. Regulation has been seen as an act of correction on the inequitable as well as inefficient practices of the market. With regard to the relativity theory of interest, the nature of income and capital has been analyzed in the report. The paper reports a comprehensive research that has been done on the article the financial impacts of BP’s response to the deep water horizon oil spill. This report shows that it is evident from the article that BP was held responsible for the oil spill and the company accepted responsibility. This report shows the financial implications BP from the oil spill as reported by the article. This report shows the loss caused by the interrupted ecosystem which is difficult to assess. This report has analyzed the article in details as well as drawing conclusion from the article regarding the financial loss suffered by the BP Company as well as the difficulties involved in determining the loss and the loss on the society in general. Introduction Public interest theory is a theory in economics that depicts that regulation is usually given in accordance to what the public demands as far as there is need for correction in case of inequitable or even inefficient market acts and practices (Baker 2005). Regulation according to the theory aims at benefitting the society at large but not those who have direct interests with the market. The regulating body or regulators are aimed at benefitting and representing the interests of the society but not their private interests. Some of the assumptions of the theory are that markets are inefficient and inequitable if there are no forces to forces to govern them. In this assumption, the government is usually neutral (Baldwin & Cave 1999). According to the article, the financial impacts of BP’s response to the deep water horizon oil spill, BP is an oil mining company that has been charged with the sole responsibility of the April 20 2010 oil spill in the Gulf of Mexico (Cleveland 2010). It accepted the responsibility to cater for the loss as well as the cleanup. This essay will analyze the public interest theory and the role of regulators with respect to the article. Discussion The major purpose of public interest theory is for the achievement of results desired by the general public. If markets are left alone without any regulation, this purpose will not be achieved. Regulation can be viewed as putting in place legal instruments for proper implementation of some objectives which mostly are social economic in nature (Watts and Zimmerman 1978). Regulation is usually done for the public but not for private interests. Corporations are usually regulated for them to comply with some prescribed behavior (Boyd 2010). Failure for the corporations to comply with the set rules usually lead to penalty or sanctioning. Regulators perform their duties in different capacities depending on the need for regulation. Politicians are such regulators who keep an eye for corporations to provide their services, earn their interest but at the same time meet the prescribed behavior (Watts and Zimmerman 1978). Accounting regulation and politics There are some perspectives that can be taken with regard to accounting information and regulation. In a free market perspective point of view, accounting information is supposed to be treated like other services as well as goods (Baldwin & Cave 1999). In such a perspective, the forces of demand and supply should be given an opportunity to operate for them to generate information about an entity. In a free market, there is basically no regulation therefore private incentive provides information based on accounting (Baldwin & Cave 1999). Where organizations fail to provide information on the accounting, higher costs of capital usually penalize them (Watts and Zimmerman 1978). In the pro-regulation perspective accounting information is considered as public goods. When the information is made available, individuals can make use of it as well as pass it to other people (Baldwin & Cave 1999). Regulation is usually necessary because it helps in decreasing the consequences associated with the failure of market (Watts and Zimmerman 1978). Role of regulators Regulators play a significant role in prevention of monopolies growth. Existence of monopolies in free markets where there is no regulators symbolizes a failure in the market system (Batker, de la Torre, Costanza, Swedeen, Day, Boumans & Bagstad 2010). This makes it important in for regulators in this case politicians to preserve competition and advocate for the necessary provision of information. This brings about the ideology of market efficacy or productiveness. Regulators have the responsibilities of providing a good environment for competition to take place well. Economies of scale enjoyed by some organizations give rise to natural monopolies. This makes the market to serve at the possible least cost (Baker 2005). These include suppliers of services like water, electricity or even gas. Regulation in this case is important and usually designed in such a way that they will maintain a trading environment that is fair (Baker 2005). Regulators prevent organizations from making supernormal profits or windfall profits (Watts and Zimmerman 1978). A good example is when firms are supplying goods as well as equipment during recovery or after a disaster. There is high demand during these times and many buyers tend not to bargain. This can make the suppliers charge higher prices than normal hence there is need for regulators to come in (Watts and Zimmerman 1978). Regulators have a role of pushing for the required information from organizations. Provision of Inadequate information my lead to information asymmetries (Batker, de la Torre, Costanza, Swedeen, Day, Boumans & Bagstad 2010). Regulation here may push for proper accounting standards to address the problem hence there will be provision of the required as well the best information to the relevant stakeholders (Batker, de la Torre, Costanza, Swedeen, Day, Boumans & Bagstad 2010). Regulations from regulators such as politicians prevent profit skimming. This is a situation that comes as a result of suppliers supplying only the commodities that that have high profits leaving other commodities that are necessary unsupplied (Baker 2005). The role of regulators in this case will be to push for equal supply of all goods and commodities regardless of their profitability hence making consumers comfortable. In the consumer’s side, there may be free rider effect which can attract regulators to intervene if the government remains neutral in regulation of businesses (Baker 2005). This is a situation where some consumers fail to pay for an expense and others pay for it at their expense. This means that some consumers will suffer at the expense of others and regulators will have a considerable role to play in such a scenario (Watts and Zimmerman 1978). The producers of the service that is not being consumed will suffer the loss and this will be a disincentive. Regulators also play a significant role in coordination as well as rationalization of economic activities. This will help in organization of behavior as well as industries in an effective and efficient manner (Watts and Zimmerman 1978). Motivation of regulators Regulators are usually motivated to push for better provision of information as well as better markets by a number of reasons. This will depend on the activities of the available firms and industries as well as the government’s role in the market (Watts and Zimmerman 1978). Some of these motivators include the following: Government’s ideology sometimes motivates politicians to be regulators and push for changes. This mostly happens in labor markets. In these scenarios, the regulators such as politicians advocate for more membership in unions to increase their bargaining power (Baker 2005). Some regulators are motivated by their own interests in organizations. This is mostly common where they need accounting information to determine whether they can invest in particular firms or industries for that matter (Boyd 2010). Regulators are usually motivated by the need to raise the standards of the general citizens as well as consumers. Some organizations as well as suppliers are guided by their own interests with the need to maximize their profits and they fail to avail the necessary information (Baldwin & Cave 1999). This becomes a motivation to regulators who are always pushing for the betterment of these situations. The widening gaps between social classes acts as a motivator to regulators who sometimes advocate for the equality and try to bridge the gap between the individuals who have a higher social class than others (Boyd 2010). Politicians are usually motivated by their need to maximize voting. They are always regulators who need to show citizens that they care about their subject’s welfare hence gather votes from them (Baldwin & Cave 1999). Article response The article the financial impacts of BP’s response to the deep-water horizon oil spill by JOËL HOUDET & CHARLES GERMANEAU gives a comprehensive analysis of the Gulf of Mexico oil spill which happened on 20th April 2010 after the explosion on the deep water horizon offshore oil platform. According to Cleveland (2010) 5 million oil barrels were released by one well known as Macondo. 4.2 million barrels of this oil was released into the Gulf of Mexico. BP, also known as British petroleum is a multinational oil company that was held responsible for the oil spill. The company accepted responsibility and was ready to take the ensuing cleanup costs (Houdet, Germaneau 2011). Two other companies which are Transocean and Halliburton were also responsible and deserved to be blamed but they were not blamed. According to the income statistics released by BP on 1st February 2011, there was a pretax charge of US$ 40.9 billion. This included US$ 17.7 billion incurred effectively on 2010 (Houdet, Germaneau 2011). The oil spill affected the ecosystem as well as socioeconomic activities negatively. About twenty categories of the valuable ecosystem around as well in the Gulf of Mexico were negatively affected. This included the shutdown of Louisiana commercial fisheries which was earning US$2.5 billion per year (Houdet, Germaneau 2011). The climate of the region was also negatively affected due to the release of hydrocarbons in the atmosphere. The cultural and recreational as well as aesthetic values were greatly affected. In July 2015 there was a ruling by the court that BP Company was solely responsible due to its reckless ness and it agreed to pay $18.7 billion in form of fines (Houdet, Germaneau 2011). The article has clearly shown that the interests of the public were greatly affected by the oil spill. The destruction of the economic activities and the ecosystem of the region greatly affected the interests of the government as well as the general public. It shows that the BP Company suffered financially as a result of the spill (Batker, de la Torre, Costanza, Swedeen, Day, Boumans & Bagstad 2010). The lost ecosystem services as well as goods cannot be measured or it is difficult to determine them. The oil spill is likely to bring about stringent regulation of gas and oil regulation activities in the US as well as other parts of the world (Houdet, Germaneau 2011). I agree with article because the authors tend to acknowledge that there is need to put into place more reliable environmental accounting as well as practices of reporting for corporate environmental performance to be serious. Conclusion In conclusion public interest theory shows that there is need for regulation on organizations work as well as the provision of the required information. The society tends to benefit from regulation rendered by regulators such as politicians. The theory aims at describing the achievement reached at when markets are regulated to fit the general public. Regulators have significant role to play such as prevention of monopoly growth. They are meant to prevent organizations from making supernormal profits among other roles. These regulators are usually motivated by a number of factors such as the widening gap among the social classes among others. This research paper has analyzed these motivators in details. The article the financial impacts of BP’s response to the deep-water horizon oil spill by JOËL HOUDET & CHARLES GERMANEAU shows how the oil spill in gulf of Mexico affected the general public due to the recklessness of the BP company which was held responsible. The oil spill damaged the economic activities of the people around due to the destruction of the ecosystem in the region. However individuals can try to show the loss caused by the spill, it becomes difficult to value in monetary terms the loss caused by the spill even if BP was held responsible. References Baker, C R (2005) “What is the meaning of ‘the public interest’ Examining the ideology of the American accounting profession”, Accounting, Auditing and Accountability Journal, v 18, pp 690-703. Baldwin, R & Cave, M. (1999) Understanding Regulation, Theory, Strategy and Practice , Oxford, Oxford University Press. Boyd, J. (2010) Lost ecosystem goods and services as a measure of marine oil pollution damages. Resources for the Future DP 10-31, 25p. Batker, D.P., de la Torre, I., Costanza, R., Swedeen, P., Day, J.W., Jr., Boumans, R. & Bagstad, K. (2010) Gaining ground - Wetlands, hurricanes and the economy: the value of restoring the Mississippi River Delta. Earth Economics Tacoma, WA. Cleveland, C., (2010) Deepwater Horizon oil spill [online]. The Encyclopedia of Earth. Accessed on October 25 at http://www.eoearth.org/article/Deepwater_Horizon_oil_spill. Houdet, J., Germaneau, C., (2011). The financial implications of BP’s response to the Deepwater Horizon Oil Spill. Comparing damage valuation approaches & highlighting the need for more reliable environmental accounting and reporting. Case study 2011-01, Synergiz – A@L Integrated Sustainability Services, 5p. Watts, R and Zimmerman, J. (1978), “The Demand and Supply of Accounting Theories: The Market for Excuses”, The Accounting Review , v 54, pp 273-305. Read More