1. Regulatory Administrative Institutions MPA-517 Lecture-4 1

2. Recap Regulatory economics Regulatory Capture Externality Negative externality Positive externality 2

3. Regulatory Capture Countering, overriding, or bypassing regulation is Regulatory Capture where a regulatory agency created to act in the public interest, instead advances the commercial or special concerns of interest groups that dominate the industry that the agency is charged with regulating 3

4. Externality In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit For example, manufacturing activities that cause air pollution impose health and clean-up costs on the whole society, whereas the neighbors of an individual who chooses to fire- proof his home may benefit from a reduced risk of a fire spreading to their own houses. 4

5. Examples- Negative Externality Air pollution from burning fossil fuels causes damages to crops, (historic) buildings and public health. Water pollution by industries that adds effluent, which harms plants, animals, and humans. Noise pollution which may be mentally and psychologically disruptive. Systemic risk describes the risks to the overall economy arising from the risks that the banking system takes. A condition of moral hazard can occur in the absence of well-designed banking regulation, or in the presence of badly designed regulation 5

6. Today’s Lecture Five Areas of Government Regulation of Business – Advertising – Employment and Labor – Environmental – Privacy – Safety and Health 6

7. Description Every government has set many business regulations in place to protect employees' rights, protect the environment and hold corporations accountable for the amount of power they have in this business-driven society. Some of these regulations stand out more significantly than the others because of their relevance to every employee and consumer 7

8. Advertising Laws pertaining to marketing and advertising set in motion by the Federal Trade Commission exist to protect consumers and keep companies honest about their product. Every business in the country is required to comply with the truth-in-advertising laws and could face lawsuits for violation. 8

9. Advertising Truth-in-advertising laws are made up of dozens of tidbits under three main requirements: advertising in the country must be truthful and non-misleading; businesses need to be able to back up claims made in advertisements at any time; and advertisements must be fair to competitors and consumers. Additionally, in compliance with the Fair Packaging and Labeling, all product labels must include information about the product, such as nutrition, size, and distribution and manufacturing information. 9

10. Employment and Labor Among the ever-changing regulations in business are employment laws. These laws pertain to – minimum wages – Benefits – safety and health compliance – work for immigrants – working conditions – equal opportunity employment – privacy regulations – and cover the largest area of subjects of all the business regulations. – Several employment regulations stand out as the heavy hitters among the others. 10

11. Employment and Labor The Employee Retirement Income Security Act ensures that employees receive the retirement plan options and health care benefits to which they are entitled as full-time employees. There are also several required benefits, including unemployment insurance, Workers' Compensation Insurance and employee Social Security assistance. 11

12. Environmental The carbon footprint of businesses on the environment is regulated by the Environmental Protection Agency (EPA) alongside state agencies. The EPA enforces environmental laws passed by the federal government through educational resources, frequent inspections and local agency accountability. The Environmental Compliance Assistance Guide exists to help businesses--small and large alike-- achieve environmental compliance, and serves as an educational resource more than an enforcer. 12

13. Privacy Sensitive information is usually collected from employees and customers during hiring and business transactions, and privacy laws prevent businesses from disclosing this information freely. Information collected can include social security number, address, name, health conditions, credit card and bank numbers and personal history. Not only do various laws exist to keep businesses from spreading this information, but people can sue companies for disclosing sensitive information. 13

14. Safety and Health The Safety and Health Act ensures that employers provide safe and sanitary work environments through frequent inspections and a grading scale. A company must meet specific standards in order to stay in business. This regulations have changed frequently throughout the years alongside the changing sanitary and workplace standards. In accordance with Safety and Health Act, employers must provide hazard-free workplaces, avoiding employee physical harm and death, through a number of procedures. 14

15. Role of Government in Business The government's role in business regulations is as old as the country itself; the Constitution gives the government the power to regulate some commerce. Though the government’s role has increased over time, the business community still enjoys considerable freedom. The government exercises its authority several ways. – Permission – Contract Enforcement – Consumer Protection – Employee Protection – Environmental Protection – Taxation – Investor Protection 15

16. It is generally recommended that governments play a facilitating rather than a direct role in markets. Regulatory interventions should be limited. Appropriate interventions are thus indirect in nature and have three general aims: · to improve market infrastructure · to improve information · to improve institutional infrastructure. 16

17. Direct government intervention in the form of marketing boards is now also recognised as generally undesirable. The result has often been to incur additional costs and wastage which might not occur in a competitive marketing situation. Problems of marketing boards tend to be: Government management styles and procedures can be too cumbersome for efficient marketing.· Few incentives exist for efficiency. Low salaries can produce corruption. Marketing boards are too often a convenient means for taxing producers and traders. Since, for marketing boards to operate efficiently, marketing channels need to be few and concentrated, livestock markets are generally not suited to them. 17

18. Summary Five Areas of Government Regulation of Business – Advertising – Employment and Labor – Environmental – Privacy – Safety and Health 18

19. Next Lecture Role of Government in Business – Permission – Contract Enforcement – Consumer Protection – Employee Protection – Environmental Protection – Taxation – Investor Protection 19