LS18 : Limits to Government Intervention

Question 1

what is regulatory capture?

Answer 1

economic theory which states that regulatory agencies may come to be dominated by the industries they are regulating. causes regulators to act with interest to benefit the industry rather than the public.

Question 2

what are the three causes of regulatory capture?

Answer 2

1. bribery
2. familiarity
3. revolving doors

Question 3

why can bribery cause regulatory capture?

Answer 3

gov officials can be motivated by financial reward so can be captured with a monetary reward

Question 4

why can familiarity cause regulatory capture?

Answer 4

gov officials work closely with members of firm who they regulate, becoming friendly. lead to bias and increased willingness to go easy on regulating.

Question 5

why can the revolving door cause regulatory capture?

Answer 5

regulators often work for companies they were previously responsible for regulating. often paid large salaries. jobs rewarded due to lenient treatment when regulating

Question 6

what is an example of revolving door?

Answer 6

blackrock making a large profit from privatisation of royal mail. george osborne was responsible for this privatisation and also had a job at blackrock with a salary of £800k

Question 7

what are the four impacts of regulatory capture?

Answer 7

1. quality
2. price
3. externalities
4. asymmetric information

Question 8

how does regulatory capture have an impact on quality?

Answer 8

if regulators do not enforce minimum standards, quality is likely to fall. if regulatory capture happens, quality of service is likely to decline

Question 9

how does regulatory capture have an impact on price?

Answer 9

prices are likely to be higher if a regulator has been captured. regulators would be more generous when setting permitted price rises

Question 10

how does regulatory capture have an impact on externalities?

Answer 10

external costs are likely to be ignored if regulators have been captured

Question 11

how does regulatory capture have an impact on asymmetric information?

Answer 11

competition policy relies on information. likely that firms have better knowledge of their firm than regulators, so is likely that information will be withheld which decreases regulators knowledge. decrease the chances of regulators being effective