1. Theories of Regulation Session 2

2. Technical justifications Monopolies & natural monopolies Information asymmetries ‘Excess profits’ – ‘fairness’ Resilience demands – security of supply Externalities/public goods Regulation as reflecting a ‘public interest’

3. Interest-group politics ‘Capture’ –Bernstein: regulation emerges in period of public outrage, but later reflects accommodation between regulator and regulated industry –Stigler: collective action problem and politician-regulators: regulation in favour of regulated industry

4. Interest-group politics (2) Interest Group politics Client politics (‘capture’) Entrepreneurial politics Majoritarian politics Benefits of regulation Costs of regulation concentrated Concentrated Dispersed dispersed

5. Institutional design perspectives Why delegate to regulatory agencies? What is the problem with control? What solutions exist for ‘control’ problems?

6. Institutional design perspectives (2) Why delegate to regulatory agencies? –Expertise, legislative decision-making costs, shifting responsibility What is the problem with control? –Time inconsistency, information asymmetry, problems with sanctions/enforcement What solutions exist for ‘control’ problems? –‘police patrols’, ‘fire alarms’, ‘deck stacking’

7. Institutional Choice What factors influence institutional choice –Decision-making costs: how costly is it for legislators to deal with the issue? –Commitment costs: How difficult is it to ensure that the flow of benefits to our constituents will continue beyond our legislative mandate? –Agency costs: How difficult/costly is it for legislators to monitor the agencies’ behaviour? –Uncertainty costs: How certain are we about the future and potential changes in technology that could affect distribution of rents?

8. What do we choose? Extent of delegation Level of autonomy of agency from legislature Extent of participation rights of affected interests Extent of legislative intervention opportunities

9. Limitations Underestimates administrative behaviour by regulatory agencies Fails to account for the ‘bargain’, the formal AND INFORMAL understandings Has a very functional understanding of law – often for issues that are inherently contradictory But: offers a first cut at pointing at key issues and accommodates institutional difference

10. Exercise: Design a regulatory agency Consumer Protection –Product advertising, product safety Environmental Protection –Pollution levels, best technology to deal with waste water, research Mining Safety –High accident rate, small industry