The Social Science Encyclopedia, Second Edition
Regulation, here defined as any rule laid down by the government which affects the activities of other agents in the economy, takes many forms, but in general the types of activities concerned and the methods of control vary together. Three broad areas can be identified.
The first is legislation: this approach is commonest for issues such as safety. Most countries have regulations concerning health and safety at work, such as protection for workers against dangerous machinery; other examples include the wearing of seatbelts in cars. Enforcement may be carried out by the normal police authorities or by special agencies such as factory inspectors.
The second category is the regulation of monopolies. A monopoly will charge higher prices than a competitive industry, so consumers’ interests need some protection. It is useful to distinguish the general case, where action is infrequent, from the particular case of natural monopoly typified by public utilities, where regulation is more continuous.
General competition law operates when a company either has, or is about to acquire, a significant share of the market; then a body such as the Monopolies and Mergers Commission in the UK would determine whether a proposed merger or takeover should go ahead. However, the benefits of monopoly can also be gained by a group of firms acting collusively, and the threat of this has led to antitrust legislation such as the Sherman Act in the USA.
The second area of monopoly regulation is that applied to industries where competition is not feasible for structural reasons; this includes much of the transport, communications and energy sectors. Here a regulator is needed more or less permanently. The difficulty then is to control the monopoly sufficiently tightly without removing all its incentive to cut costs and develop new products. Two main methods have been used: rate-of-return regulation, where the firm may not exceed a given percentage return on its capital assets, and price-capping, which controls prices directly.
The final method of regulation is self-regulation, where an industry polices itself. This seems to occur where the problem is incomplete knowledge on the part of consumers. In areas such as medicine or the law, consumers depend on the doctor or lawyer making the right decision on their behalf. Some control of practitioners is therefore needed, and licensing is delegated to their professional bodies: someone ‘struck off’ their registers can no longer practise. Financial services markets are often self-regulatory too, requiring membership of the appropriate organization to work in the market, although the banking system is regulated by the government’s central bank as part of its general responsibility for the stability of the financial system.
Stephen Trotter
University of Hull
Further reading
Crew, M.A. and Kleindorfer, P.R. (1986) The Economics of Public Utility Regulation, Basingstoke.
Francis, J.G. (1993) The Politics of Regulation, Oxford.
Gowland, D. (1990) The Regulation of Financial Markets in the 1990s, Aldershot.
Sherman, R. (1989) The Regulation of Monopoly, Cambridge, UK.
See also: cartels and trade associations; law and economics; monopoly; privatization; supply-side economics.
This is the complete article, containing 499 words
(approx. 2 pages at 300 words per page).
View More Summaries on Regulation
