Eco 2.3 Flashcards
1
Q
What do you understand by Regulation?
A
- Regulation refers to govt intervention in markets that involves rules and their enforcement. Regulation may develop proactively or re-actively.
2
Q
Why do Regulations exist?
A
- To protect end users from market failings. Regulations are necessary because market solutions are not adequate for all market situations.
3
Q
What is the fundamental theorem of welfare economics?
A
- Given no frictions and no externalities, allocations of resources in a market are efficient.
4
Q
What is the economic rationale for regulations?
A
- In real world, we do have informational frictions and externalities which impact the allocation of resources thus creating a need for regulations.
5
Q
What factors influence the presence of regulations in an economy?
A
- Factors such as informational frictions, externalities, weak competition and social objectives.
6
Q
What issues are created due to informational frictions?
A
- Two major issues are:
a. Adverse Selection - Private info in the hands of some market participants which can allow them to gain money at the expense of other participants in the market. Example, insider trading - cos of which regulations prohibit acting upon insider info.
b. Moral Hazard - Principal/Agent problems like managers hold insider info and may act differently than the expectations of the principal share holders.
7
Q
What are externalities?
A
- Externalities are spillover effects of production & consumption on others who are not directly involved in a particular transaction, activity or decision. Can be positive or negative. Negative can be environmental pollution and Positive can be improvement of home prices in a neighborhood as some home owners improve their houses. Negative can also be a failure of a large bank as it will not only affect the customers/clients of that bank but also other banks in the financial system and the economy as a whole.
8
Q
Explain weak competition and social objectives?
A
- a particular company that’s gaining more control in the market (monopolistic competition) is a good example. The prices keep going higher and the choices for consumers keep getting lower. Thus, regulations are needed to prevent a company from becoming too strong in the market. Social objectives can be achieved by providing public goods that would not be provided by the market. Police Protection, Education, Defense etc will be provided by the governments and not profit making companies.
9
Q
Explain the rationale behind the regulation of Financial Markets?
A
- There are some major objectives of financial market regulation:
a. Integrity of financial markets. Examples, regulations on disclosures by public companies, regulations on insider trading etc
b. Agency problems. Principal/agents problems like asset managers of a fund using brokers which don’t benefit the investors.
c. Financial stability
d. Economic growth
e. Retail investors vs institutional investors
f. Prudential supervision - the regulation & monitoring of the safety and soundness of financial institutions, in order to promote financial stability, reduce system-wide risks & protect customers of financial institutions.
10
Q
Explain the role of govt for regulation of commerce.
A
- provide an underlying framework to enterprises.
- Sound legal environment.
11
Q
What are the issues related to the regulation of commerce?
A
- Environmental issues
- intellectual property: patents, copyrights, trademarks etc.
- Privacy
12
Q
Explain anti-trust regulation & framework.
A
- Global vs domestic context/perspective. Antitrust laws work to promote domestic competition by monitoring & restricting activities that reduce or distort competition. Anti-competitive behaviors include: M&A with objective of getting more pricing power. Price collusion, Predatory pricing, price discrimination.
13
Q
Classification of Regulators and Regulations:
A
- Legislative bodies (USA - Congress) are the regulators and regulations are the laws created by regulators that need to be followed like Statutes formed by the Congress in USA. Courts are also regulators which have made judicial law as the regulations to be followed.
14
Q
Explain Self-Regulation in Financial Markets.
A
- Self-regulating bodies are private non-government organisations which represent and regulate their members and can discipline members that violate rules & principles and are isolated from govt pressure.
Self-regulating organisations (SROs) are given recognition and authority by the govt and are funded independently. Classic example can be Financial Industry Regulatory Authority (FINRA) which has been given some regulatory authority by US SEC.
Level of authority differs across different SROs.
15
Q
What are regulatory inter-dependencies?
A
- There are 3 major types:
a. Regulatory capture - Reducing regulations in the favour of a major company where the senior regulatory officers get an advantage or a share of the company. Pharma company example.
b. Regulatory competition - Competition between regulators (across countries) - where regulators reduce regulations to attract large companies to invest in their countries. It’s a race to the bottom.
c. Regulatory arbitrage - From the perspective of the companies that are being regulated - where a company might want to move to a country with less regulations/favourable regulations.
