Economics of Regulation and Antitrust - Essay Example

Economic Regulation Economic regulation is a controversial issue that has brought about diverse opinions and thoughts. Some have argued that economic regulation is a positive driver in the economy of a country while others have strongly refuted these claims. This gives rise to the big question as to what is economic regulation and what effect does it have in the economy or the market? Economic regulation can be defined as the application of legislative measures and acts to control the economy of a country by the government for a particular reason or reasons (Balleisen, and David 11).The reasons as to why the government might decide to use legislative and administrative measure to control the outcome of the economy of a country varies from one nation to another. The government might apply laws to regulate the economy of the country so as to facilitate proper planning of the economy, to shield the economy from market failure or to protect the consumers from products or services that it deems dangerous to the citizens. When a government decides to enforce economic regulation measures to protect the consumers, there are two rationales that are normally involved. First, the government might decide to regulate the economy in order promote the social welfare of the consumers. This can be for example done by forcing the monopolistic firms to produce a level of output that is intended to promote the social welfare of the citizens. Another consumer protection rationale that might prompt a government to regulate the economy is to protect the consumer from externalities. Negative externalities may have adverse effect on the consumer and the government might intervene to protect the consumer. An example of a negative externality that might force the government to regulate the economy is pollution. When an industry has high level of pollution, the government might regulate its operations my setting standards that control the level of waste from that particular. Economic regulations can also be done with the aim of enriching well connected firms operating in a particular country by shielding them from competition or to benefit politicians who run the government o the day. Economic regulation in any given economy might take various forms depending on the intentions of the government for putting the regulatory measures in place. The government may decide to use public statutes and standards to accomplish its goals for regulating the economy (Kessler, 43). The regulation can also be enforced through the process of registration a business and licensing. Process of inspection to ensure that the businesses or firms comply with the set rules and regulations may also be employed. Lastly, delicensing is also used in certain countries or markets to gain control of the economy with a particular objective in mind. There has been a lot of debate about the effects economic regulations on the market. The government always has a specific target or objective as to why it is regulating the economy. Economists from around the world have done a lot of research on the real effect of these regulations on the market. Various studies have revealed various effects of the economic regulation in different countries and markets. These studies have tended to agree that in almost all markets, the effect o economic regulation depend on four parameters. The first determinant of the effect that economic regulatory measures will have is the motivation of the regulation. Economic regulation may be motivated by the need to shield the market from failure, to protect the customer or to protect firms from rivals among other things. These motives for coming up with regulation plans determine the effect it will have when it is executed. Secondly, the nature of instruments used to execute these regulations also dictates the kind of impact it will have. The regulations, as discussed earlier, can be done through public statutes, licensing and delicensing as well as through inspections carried out to ensure compliance. These also tend to determine the effect of the whole procedure. The other factor that also determines the effect of economic regulations in a market is the structure of the process. This includes the way the whole process will be executed and the bodies involved in carrying out the regulation in the economy of that particular country. Lastly, the other parameter that has been widely agreed on to affect the outcome or effects of economic regulation is the legal and political environment in a country. The political environment dictates the type of regulation that will be used and the process that will be employed to execute these regulations. The political environment also determines to some extent the motives of carrying out economic regulations. For example in countries that are led by dictatorial regimes, the political environment in these countries will facilitate carrying out economic regulations with the intentions of benefiting those in power or those firms with good connections with those in the dictatorial regimes. Therefore, the type of political environment in the country will determine the effects of economic regulations by influencing all the other three factors discussed above. Various studies have also revealed that contrary to the thoughts of the general public on the effects of economic regulation, the real effects that result from economic regulations are different from the normal thought. Generally, the public usually think that economic regulations will result in rectification of the imperfections of the economy and enhancement of efficiency. This has been hugely opposed by the research work that has been done to determine the real quantifiable effects of economic regulations in a country. In order to understand and clearly reveal the effects of regulating the economy, comparison between regulated firms and unregulated firms has been widely done. This has enabled economists come up with comprehensive conclusions on the effects of regulated economy. From these studies that have been done, there are four areas have been widely used to explain and show the effects of economic regulations. It has been widely agreed that the effects economic regulation is clearly seen and felt on prices, static production cost, innovation and technology as well as product quality. These are the four major areas that have been identified to reveal the effects of economic regulations in a country. The effect of economic regulations on prices usually depend on the industry in question ,the duration of the regulation and the type of regulation that is being enforced by the government or government agencies. Economic regulations have been seen to increase prices, decrease prices and at times these regulations do not have any visible effect on prices. In addition, these regulations may also distort prices in a given market. Economic regulation may lead to increase in prices through several ways. An example is by giving advantage to some firms or industries. This will result in increased demand hence higher prices. This effect of economic regulation has been shown by the recent research that was carried out by the National Economic Research Associates on The Clean Air rule and the Maximum Achievable Control technology (MACT).The MACT regulation requires the power generating plants using coal to install new technologies to cut down the sulfur emission into the air. These regulations, the studies have shown, will lead to increase in the cost of electricity. This is because most coal powered plants will shut down their plants and resort to other options leading to reduction in electricity produced. Furthermore, the regulations will lead to increases in the price of natural gas generated electricity because of increased demand. This will lead to increase in price (Williams, 5). The second effect of economic regulation is on the static cost of production. Economic regulation may lead in distortion of the production efficiency of a company because of the new requirements that the regulation may want to be incorporated in the production process. Moreover, the cost of complying with new requirements may force the company to incur additional financial expenses that will in turn result in increase in the cost of production and reduction in profits with losses being experienced in some extreme cases. Fines changed for non compliance also lead to increased cost on the side of the industries and firms. However, in some selective case, economic regulations may lead to lower cost of production. An example is whereby the regulations that are implemented leads to the reduction in the cost of raw materials used by a given industry. This reduction in raw material cost will lead to reduction in static costs of production. These regulations also impact directly on the cost of production since they may determine the technology that is used in a certain process. When the economic regulations bans the usage of a certain technology that is being used by a firm, it will increase production cost as the firm will have to look for a different technology or redesign its production process all together. This might even require training of the employees on the new process and technology resulting to additional cost of production. Economic regulation can impact both negatively and positively on innovation. This basically depends on how the regulation is being imposed. Stringent economic regulations tend to limit and discourage innovation and reduce the chances of growth in productivity. This is because when the regulations are stringent, they do not allow the firms or industries to come up with alternative ways of compliance. This will therefore hinder innovation. On the other hand, when the regulations imposed are flexible in nature, they will most likely promote and encourage innovation as the firms will be allowed to come up with their own measures on how to comply with the requirements with no specific way of compliance being imposed on them. This will also facilitate productivity growth. The other area of interest that is considered when unearthing the effects of economic regulation is the impact it has on product quality. Generally, regulation of the economy leads to increased product quality. An example is when the government sets the maximum price for a given service that is widely used in a country such as the call rates. This regulation will result in non-price competition among the different service providers. They will come up with different fronts for competing with one another other than price. In the long run, the non price competition will lead to better services to the consumer. Therefore economic regulation will have led to higher quality of product (Grajek and Lars-Hendrik, 184) The discussion on economic regulation and the impact it has on the consumer, firms and on the economy is a topic that will not be concluded soon. The supporters and beneficiaries will continue championing economic regulations while those who have been negatively impacted by these regulations will continue opposing it. References Balleisen, Edward and David A. Moss. Government and Markets: Toward a New Theory of Regulation. Cambridge, UK: The Cambridge University Press, 2010 Grajek, Michal and Lars-Hendrik Röller. “Regulation and Investment in Network Industries: Evidence from European Telecoms.” Journal of Law and Economics.55 (2012): 189-216. Kessler, Daniel P. Regulation vs. Litigation: Perspectives from Economics and Law. National Bureau of Economic Research Conference Report. Chicago: University of Chicago Press, 2010 Williams, Ronald. The impact of Regulation on Investment and US Economy. University of Chicago. Econ Papers (2014):7-9 Read More