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BG
10
471.23
Fall 2013
Regulation
Law, Economics, & Politics
Baron ch 10
Times of change
late 1800s Populist era
1930s Progressive era the New Deal
1960s… social regulation
1970s… econ deregulation
2010s… ?
Main Fed Bodies
1913 Federal Reserve System
1914 Federal Trade Commission
1916 International Trade Commission
1930 Federal Energy Regulatory Commission
1931 Food & Drug Commission
1934 Securities & Exchange CommissionFederal Communications Commission
1935 National Labor Relations Board
Main Fed Bodies
1948 Federal Aviation Administration
1961 Federal Maritime Commission
1965 Equal Employment Opportunity Commission
1970 Environmental Protection AgencyNational Highway Traffic Safety Administration
1972 Consumer Product Safety Commission
1973 Occupational Safety & Health Administration
1975 Nuclear Regulator Commission
Types of Interventions
Controlling prices
Setting floor prices
Providing for solvency
Controlling # of market participants
Types of Interventions
Establishing service territories
Providing product information
Rationing common pool resources
Allocating public resources
Controlling “unfair” international trade
Types of Interventions
Mandating product characteristics & tech
Establishing performance standards
Requiring premarketing approval
Ensuring product safety
Controlling toxic emissions & other pollutants
Types of Interventions
Ensuring equal opportunity
Regularizing employment practices
Specifying qualifications
StructureWhy regulation?
A. “theory” of market imperfections1. natural monopoly2. externalities
pecuniary vs. nonpecuniary approaches
3. moral hazard4. public goods5. asymmetric information6. government imperfections
B. capture “theory”C. rent-seeking “theory”D. political “theory”
What do regulators do?1. Command & Control2. Incentives3. Persuasion
Why regulation?
regulation has always existed
If a merchant give an agent corn, wool, oil, or any other goods to transport, the agent shall give a receipt for the amount, and compensate the merchant therefor. Then he shall obtain a receipt from the merchant for the money that he gives the merchant.
Code of Hammurabi (para. 104) ca. 1750 BC
Why regulation?
in the US utilitarian rationales dominate
A. “theory” of market imperfections
B. capture “theory”
C. rent-seeking “theory”
D. political “theory”
Language for public consumption & for regulatory consumption differs.
Why regulation?
A. theory of market imperfections saving capitalism from itself
We have always known that heedless self-interest was bad morals; we now know that it is bad economics.
FD Roosevelt
Why regulation?
A. theory of market imperfections wealth not maximized inefficient allocation of
• resources
• money
• labour
not:market does “bad” things
Why regulation?
A. kinds of market imperfections1. natural monopoly
2. externalities
3. moral hazard
4. public goods
5. asymmetric information
6. government imperfections
1. Natural Monopoly
likely if economies of scale
almost certain if 1 economic agent can
produce more cheaply than 2
controversial necessarily bad? inevitable? durable?
Why regulation?
A. “theory” of market imperfections1. natural monopoly2. externalities
• pecuniary vs. nonpecuniary• approaches
3. moral hazard4. public goods5. asymmetric information6. government imperfections
B. capture “theory”C. rent-seeking “theory”D. political “theory”
2. Externalities
actions affecting others not engaged in decision transaction
• 1 pollution
• multiple rent property for noxious use
2. Externalities
can be either harmful
• I store a junk car in my front yard
beneficial• I put art in my front yard
http://www.flickr.com/photos/grapejuicegirl/190714506/
2. Externalities
pecuniary affect through changes
in prices• of goods & services
nonpecuniary affects
• preferences
• production opportunities
of economic agent(s)
• city folk buy all the houses in my quaint little town as weekend retreats
• intervention? if negative
» then maybe
• hog producer sets up barn right beside my bed and breakfast in that quaint little town
• intervention? if negative
» then usually
2. Externalities
responses• enviro-levy
• command-and-control regulation
• incentive approaches
attempt being made to change from nonpecuniary to pecuniary change from externality to internality
2. Externalities
The Tragedy of the Commons» http://www.sciencemag.org/sciext/sotp/commons.dtl
For that which is common to the greatest number has the least care bestowed upon it
AristotlePolitics 2:3
2. Externalities
The Tragedy of the Commons
For that which is common to the greatest number has the least care bestowed upon it
AristotlePolitics 2:3
Why regulation?
A. “theory” of market imperfections1. natural monopoly2. externalities
• pecuniary vs. nonpecuniary• approaches
3. moral hazard4. public goods5. asymmetric information6. government imperfections
B. capture “theory”C. rent-seeking “theory”D. political “theory”
3. Moral Hazard
similar to an externality
people don’t bear full cost of actions seat belts building on a flood plain a bank making risky investments
Why regulation?
A. “theory” of market imperfections1. natural monopoly2. externalities
• pecuniary vs. nonpecuniary• approaches
3. moral hazard4. public goods5. asymmetric information6. government imperfections
B. capture “theory”C. rent-seeking “theory”D. political “theory”
4. Public Goods
“consumption” by 1 doesn’t prevent consumption by another
• national defense
• radio broadcasts
• street lights
Who will pay? Who will do it?
5. Asymmetric Information
another buyer knows more than you
so they can buy for less
• seller doesn’t get maximum price
seller knows more than buyer
buyer gets less value• alternative purchase
prevented
• insider trading
• seniors & home repair
• car repair
• house sales
• drugs
5. Asymmetric Information
especially a problem if info is costly
usual solution forced disclosure
6. Government “imperfections”
…government is not the solution to our problem; government is the problem.
Ronald Reagan1st Inaugural Address1981
Why regulation?
A. “theory” of market imperfections1. natural monopoly2. externalities
• pecuniary vs. nonpecuniary• approaches
3. moral hazard4. public goods5. asymmetric information6. government imperfections
B. capture “theory”C. rent-seeking “theory”D. political “theory”
Why regulation?
B. capture theory measures initially taken
• because of market imperfections
over time• measures evolve to benefit regulated entities
broadcast regulations
Why regulation?
B. capture theory
C. rent-seeking theory regulations established to benefit politically
effective interests• railroads
Why regulation?
B. capture theory
C. rent-seeking theory
D. political theory all interest groups seek regulation to serve
their interests• laws governing unions
Why regulation?
A. theory of market imperfections
B. capture theory
C. rent-seeking theory
D. political theory
In US, utilitarian arguments are the least controversial.
Influences on Regulators
What do regulators do?
1. Command & Control
2. Incentives
3. Persuasion
1. Command & Control
Regulators order engineering controls
• scrubbers for coal-fired electric power plants
or require the best available tech• for pollution abatement
2. Incentives
Take into account benefits costs
of attaining environmental objectives
Align social costs private costs
of pollution and its abatement
2. Incentives
tradable permits system aka cap-and-trade systems
max total allowable set issue permits (entitlements)
• for that amount
allow permits to be traded gradually reduce total
3. Persuasion
shaming shaping
• information
Finance Minister Jim Flaherty suggested Monday some banks will make changes to how they charge fees for their automated banking machines.
CBC
Business & the Environment
EPA
Enviro Politics
NIMBY
Voluntary Programs
Social Efficiency Coase Theorum
EPA
Environmental Protection Agency “independent” agency in executive branch
budget $7.8 billion in 2005 18,000 employees
administrator appointed by President confirmed by Senate
EPA Responsible for admin major enviro acts
47 Insecticide, Fungicide & Rodenticide (72, 88)
63 Clean Air (70, 77, 90)
65 Solid Waste Disposal
67 Air
69 Enviro Policy
70 Water (72, 74, 77, 87)
72 Enviro Pesticide Control
73 Endangered Species
74 Safe Drinking Water
76 Toxic Sub Control (88)
76 Resource Conservation & Recovery
80 Superfund Comprehensive Environmental Response, Compensation & Liability
86 Emergency planning & Right-to-Know
90 Ocean Pollution
90 Pollution Prevention
90 Oil Pollution
92 Reclamation Projects
96 Food Quality Protection
e.g.: Superfund
cleanup existing toxic waste disposal sites• ~ 20,000
• ~ $600 b
attempts to • identify source of dumping
• force it to clean site
criticism: “retrospective liability”
EPA “Activism”
Internet send info to citizens & local groups
focus on possible health risks children more than enviro effects
use other laws
Enviro Politics
complex scientific uncertainty
• causes
• consequences
incomplete info• costs
• benefits
long timelines
Enviro Politics
motivated by distributive consequences normative perspectives about
• protection of environment
• health
Enviro Politics
contentious jurisdiction
• fed/state
• between countries
reason for action• utilitarian vs. values-based
time• “But what about the children!?”
Enviro Politics
contentious disagreements
• alternative approaches liability vs. regulation
• value of protection
significant economic consequences• profits
• jobs
• trade
NIMBY
“Not In My Backyard”
local environmental concerns possible risks to persons or property
focus often refuse disposal sites toxic waste sites chemical and oil plants
NIMBY
TRI• Toxics Release Inventory
• Federal
22,000 plants 300 chemicals
amendment to Superfund reauthorization 1985
Voluntary Programs
ISO 14001 a worldwide environmental program improve enviro management systems 36,000 companies 1,500 in US
“responsible care” chemical industry
Social Efficiency
less safe more safe
$
injurycosts
safety costs
total costs
Coase Theorem
A BNet
Social Value
production
emissions
profitharm
0 0 0 0 0
100 10 40 -20 40-20= 20
200 20 70 -60 70-60= 10
1991 Nobel Prize in Economics
Coase Theorem
“Social efficiency can be achieved regardless of which party is assigned the entitlements.”
However distributive consequences differ
Coase Theorem
negotiations to max social value desired only occur if
• entitlements clearly assigned protected
“internalize the externality” “social efficiency”
A Bnet
social value
production
emissions
profit
harm
without abatem
ent
0 0 0 0 0
100 10 40 -20 20 with abatement
200 20 70 -60 10
reduce
cost to abate net social value
if A abates
if B abates
if A abates if B abates
50% -15 -2070-20-15=
35
70-20-20=
30
100% -30 -4070-0-30=
40
70-0-40=
30
Coase Theorem: Abatement
Social Efficiency
less safe more safe
$
injurycosts
safety costs
total costs
Social Efficiency in Pollution Abatement
emissions abated
$
cost of harm
cost of abatement
total cost of abatement &
harm
socially efficient abatement
Social Efficiency in Pollution Abatement
generally right wing
• prefers permits
left• prefers taxes
Social Efficiency in Pollution Abatement
permit advantages know amount beforehand price of permits built into product create a market in permits
• external actors can buy permits
incentive to innovate• equal or greater
no temptation to tax
all this sounds very nice & logical
however, permit politics is contentious “right” to issue permits
• whether to permit at all
amount to permit• if changes?
how distributed• allocated?
• auctioned?
Social Efficiency in Pollution Abatement
The Tragedy of the Commons