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Theories of Economic Regulation

Financial Accounting Theory

The basic role of any elected government is to constantly better the economic conditions of the general population in nation. This involves conducting a host of activities ranging from legislation, taxation, investment in infrastructure and business enterprises as well as monitoring and regulating economic activities happening in the country.

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Management of public affairs is always a concern for citizens in any nation. The main reason is that the holding public office confers immense power to the officers or politicians. Eradicating self interests and bias is always a delicate balance. The temptation to abuse these powers is high bearing in mind that they have the ability to influence economic trends an act that can lead to the compromise efforts to improve the welfare of the public in serving some interest of certain selected groups. This introduces a course for collusion between the masses and their leaders. The public is thus always concerned with how the political leadership uses the conferred powers to influence both economic and non economic factors and how the influences advantage or disadvantage certain groups in the society. In performing the checks and balances, the influence of the high powerful and mighty is always a major concern. This is because they have the economic power to compromise the leadership towards serving their interests in the process of performing their duties. The implications of such biases are almost always negative for the general public. This paper discusses two theories of economic regulation concerned with the management of public affairs and assesses their application in the given scenario. The theories are discussed taking to consideration the real life situations witnessed in various places and exhibiting areas where there have been tendency for conflict of interest. The critical point in the discussion on the theories is the participatory role of the nation’s populace in ensuring that policies are reflective of their interests. This is with the understanding that different parties have some interest in certain regulations as they may gain or loose depending on the direction of regulation. In the economic interest approach the feasibility of regulation is measured on the platform of economic plausibility and the ability to serve the interest of the overall citizenry in the economy. The capture theory however dismisses the needs of the citizenry. In this theory it is the industries, companies and the economically powerful that influence regulation in a bid to make the most gain from the creation of favorable conditions for conducting their business activities. The differences are a concern for economics and political science. They point to the reason for the existence of regulations and more importantly the driving forces behind the regulation

Economic Interest Theory

The theory propagates economic regulation by government in the case where the market is unable or unwilling to regulate itself. Failure in the market place occurs in the cases where the forces of demand and supply are unable to determine proper prices for goods and services. The main reason for the inability to set proper prices is lack of effective competitiveness due to monopolistic market practices and the existence of externalities which are not catered for in price setting.

Monopolistic markets are dominated by only one supplier but numerous consumers. The monopoly firm has the incentive to charge high prices so as to make high profit margins but produce fewer quantities. This is because there is no risk of loosing business to other suppliers. The result of such action is that the price is set way above what the majority of the citizens can afford. This means that the reason for the formation of the business enterprise in terms of offering certain products to the general public cannot be fulfilled. In such a case in becomes a concern of the relevant government authorities to develop regulatory measures in a bid to lower prices to sustainable levels for the larger population an outcome which is not in line with the government’s agenda of availing a vast range of services to the citizenry. Apart from monopolies, there are other market structures such as oligopolies which may have substantial powers in the market to influence the prices. Cartels comprising several major suppliers may also result in the fixation of prices way above the competitive prices thus overcharging the public.

In many nations legislation with the aim of restricting monopolistic practices have been enacted. The basic premise is that most natural monopolies provide basic products and services. These include public utilities such as electricity, water, sanitary services and security related products. Legislation on price ceilings is thus common in the less developed countries. In more developed countries, existence of monopolies is limited. Focus is on restricting the formation of cartels bent on raising prices beyond the competitive rates.

The existence of monopolies is as a result of several factors. The high cost of entry is the most importantly. Here monopolies emerge due to the fact that the investments required are very high. This necessitates the government’s involvement in funding the investment activities towards the provision of crucial services. The market share required to support the full utilization of the facility set up is large hence the need to have a single firm in operation. Other reasons for monopolies may be related to technological requirements for such operations which shut out other players in the market. The powers held by the monopolies can be detrimental hence government intervention is required.

The problem of externalities emerges when the cost or even benefits related to the production certain goods or services are not fully incorporated in determining the price. A good example is the environmental degradation resulting from industrial activities. The negative effects on the air, water and the general environment is not incorporated in pricing the goods. This means that the forces of demand and supply prevalent in the market cannot lead to optimal production. The costs are lower than the actual hence the quantities produced are more than the sustainable amounts. Positive externalities result in the case where the benefits accruing from the production of certain goods and services are not fully integrated in determining the price. The effect is that less than optimal quantities are produced hence the maximum benefits cannot be realized.

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In both of these cases government intervention is required. Negative externalities elicit restrictive reactions from the government through proper pricing an act which is clearly to the benefit of general public. Positive externalities are encouraged by the government through ensuring that the extra benefits are paid for hence motivating the suppliers.

The public interest theory hence explains the process of managing public affairs as that which is best interest of the public. This includes taking care of the monopolies, externalities and the need to make public certain information relating to businesses. The efforts are made to protect the public from harmful behaviors done by businesses.

Capture Theory

Since the 1970’s the authority of the public interest theory was challenged. It became explicitly evident that government agencies seldom acted in public interest. Instead the interest of specific groups and individuals ruled. Researchers suggested that some government agencies are “captured” by industrial players in the area of operation. This view is on a premise that the most vibrant political actors in regulation of particular industry are the companies in that same sector. In a state like Texas in the US, interest in the regulations promulgated by the Texas Railroad Commission is observed most among the companies operating in the oil and natural gas industry. Also, the Texas Farm Bureau is known to be most concerned in any regulations concerning the Agricultural industry. This is based on the common understanding that whatever regulations put in place will most affect the actors in the industry mainly on the profitability aspect a factor which elicits strong responses from the company leaders.

The acute focus on economic focus means that each government department charged with the responsibility of regulating the industry is controlled by the industrial actors in the form of associations. Again, it is clear that actors in one industry seldom interfere with the regulations happening in a different industry. This means that unlike the assertions made by the public interest theory, there exists little or no competition for control of government policies based on economic or public interest. In any industry an association or even a major player dominates the process of regulation and is cautious enough to affect other industries (Joseph, & Mark, 1984, p68).

This means that the general citizenry is not part of the considerations made in development of industrial regulation. The cause of these is two fold. One, there are great complexities involved in regulation which is more often than not arcane hence understanding is limited to those with the requisite knowledge. Secondly, impact in each person in the population is definitely low in comparison with the businesses being affected. This means that the business community will always be the loudest

In a case where the government intends to regulate the emission of noise in the environment, the most significant effect on the individual would probably be not playing loud music in their houses. This may be a mere inconvenience for the individual. For a business enterprise, it may mean investing millions of dollars in purchasing silent production equipment and sound proof materials for the building. Again, in a case where there is need to reduce electricity charges, the business community will be at the fore front as the cost implications are immense compared to the individual who may just have to part with a few extra money.

The two theories give two different views on how public management is conducted. The economic interest theory explains the action of government agencies as being guided by economic and social factors in play. The captured theory portrays the full control of government agencies by the economically strong and more importantly the concerned parties to the agencies scope of regulation.

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Alcohol case

The regulation of the UK alcohol is clearly not to the expectation of the merits of public interest. The writer argues that the UK government is too close to the drinks industry to properly regulate it. As a result, opinion of the government as pertains excessive consumption of alcohol is in that more should be on education, improved policing and better treatment of alcohol problems. This according to Professor Wayne Hall leaves out the most important remedy in the form of imposing higher taxes on strong alcoholic drinks. Instead of acting to reduce alcohol in take, the government actually legalizes alcohol drinking 24 hours a day. The cost of alcohol abuse is in the range of ₤30 billion annually (George, 1971, p45)

Taking to considerations all these assertions by Professor Wayne, the Captured Theory is evident. The UK government has great focus on boosting the alcohol sale despite the negative social and economic effects in the country. It is clear that the government regulatory agency is under the control of the alcohol manufacturers who ensure that the regulatory framework for the industry does not hurt the industry. The flimsy reasons given for the high level of alcohol abuse cannot be as effective as restricting the intake of alcohol. Comparison to other countries such as Australia exhibits the high level of control the UK government is under the alcohol industry actors (Glendon A. & Schubert, Jr. 1957).

The economic interest theory is not applicable in this case. The reason is that there is little regard to the effect of high alcohol consumption in the society. The government has very loose control of consumption a fact which encourages dependency on alcohol resulting in social degradation. Also the economic cost of the alcohol abuse to the economy is high but this fact is fully disregarded in developing policies.

In conclusion, the reality of captured theory cannot be over emphasized. The government regulatory agencies are least concerned of the externalities resulting from the production of alcoholic product causing the abuse of alcohol as proposed by the economic interest theory. This reality is overridden by the private interests of the alcohol manufacturers in profit making.

Reference List

Capture Theory and Monopoly Control, 2009. Theories of Economic Regulation. Web.

Glendon A. & Schubert, Jr. 1957. The American Political Science Review, 51(2) American Political Science Associations. [Online] Web.

Joseph P. Kalt & Mark A. Zupan, 1984. Capture and Ideology in the Economic Theory of Politics. The American Economic Review, 74 (3). [Online]. Web.

George J. Stigler, 1971. The Theory of Economic Regulation. The Bell Journal of Economics and Management Science, 2 (1) [Online]. Web.

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