Regulation & Market Failure Flashcards
(30 cards)
What is regulation in economics?
A rule or law by the government to change the behavior of economic agents and correct market failure.
Is regulation a market-based or non-market-based approach?
Is regulation a market-based or non-market-based approach?
Why don’t we draw diagrams for regulation like we do for taxes or subsidies?
Because regulation doesn’t affect the market through price mechanisms.
What is the “command and control” approach in regulation?
Government commands behavior (e.g., bans, limits) and controls it through enforcement and punishment.
Name three types of regulation.
Bans (e.g., smoking), limits (e.g., emissions caps), and compulsory actions (e.g., warning labels).
What’s an example of an innovative regulation?
Deposit-refund schemes where you pay extra for a plastic bottle and get it back when you recycle.
What types of market failures can regulation address?
Under/over-consumption and under/over-production.
Why is strong enforcement important in regulation?
Without it, people may ignore the rules.
What makes a punishment effective in enforcing regulation?
It must be strong enough to deter breaking the law (e.g., large fines or bans).
What is a risk if punishment is too weak?
People may break the law and accept the minimal consequences.
What is the goal of command and control regulation?
To change the behavior of economic agents so consumption or production moves to the socially optimal level.
What does “non-market-based approach” mean in the context of regulation?
It does not use price signals like taxes or subsidies to influence behavior.
What is the intended outcome of effective regulation?
Improved allocative efficiency and a welfare gain for society.
Why is the control aspect of regulation important?
Without strong enforcement and monitoring, the regulation may not be followed and will fail.
What are the administrative costs of regulation?
Creating, enforcing, and monitoring compliance with regulations, which can be expensive.
What happens if the government cannot cover regulation enforcement costs?
Regulation becomes ineffective due to lack of enforcement.
What is the role of the command element in regulation?
It sets specific rules or limits (e.g., bans, quotas) to influence behavior.
What is the risk of regulations being too strict on firms?
Firms may face high costs, reduced profitability, and might relocate to countries with looser regulations.
What could happen if regulation is too strict on consumers?
Consumers may seek alternative (possibly illegal or unregulated) suppliers.
What balance must regulation achieve to be effective?
It must be strict enough to create incentives to change behavior but not so strict that it causes avoidance or economic harm.
What is a potential downside of strict regulation on firms?
It may increase their costs significantly, leading to reduced production, relocation to countries with looser laws, or even business shutdowns.
How can strict regulation affect government tax revenue?
If firms shut down or move abroad, the government loses tax revenue—leading to fiscal strain.
What is the risk of regulation being too lax?
It won’t create strong enough incentives to change behavior, failing to correct the market failure.
What is the black market effect in regulation?
Overly strict regulations may drive consumers and firms to illegal or unregulated markets to bypass rules.
