Regulatory Failure Flashcards
(5 cards)
Why may Regulations fail?
• Regulatory capture: a form of government failure; it happens when a government agency operates in favour of producers rather than consumers. Also known as a form of political capture or “cronyism.”
• Asymmetric information/information gap: the industry may have more information than its regulators and use this to reduce regulation
• Inadequate resources for the regulators
• Insufficient power given to the regulators
What is Nationalisation?
The transfer of ownership of assets/businesses from the private sector to the state (public) sector.
Reasons for Nationalisation?
• Improve health & safety standards
• National interest / strategic industries
• Improve equality (of opportunity)
• “Too big to fail” i.e. collapse / failure would be too risky for the
economy
• To gain economies of scale (productive efficiency)
• To increase allocative efficiency (MC pricing)
• May take externalities into account in decision-making
• Better industrial relations
Arguments against Nationalisation?
• Diseconomies of scale
• Lack of competition (higher prices, less choice)
• Lack of incentives to minimise costs (X-inefficiency)
• Lack of supernormal profit (less innovation, less dynamic inefficiency?)
• Risk of moral hazard (e.g bail outs for banks post-GFC)
• Taxpayers ‘fund’ any losses
• Regulation of privatised industries may work better than full
nationalisation
