Regulation the interface between business

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Regulation the interface between business
government

• BA107 Social and political environment of
  business
• Section 7

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Agenda

• A debate among the legislators
• Some theoretical retrospects
• The schools of regulatory theories
• The rationale of regulation

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A Debate among the Legislators Regulation of
media ownership cap and drug import

• Suppose you are a legislator sitting in the
  Capitol Hill, debating on two bills to be voted
  on within twenty minutes. You are either on the
  proponent side or the opponent side. Now You have
  a last chance to defend your opinion on the bill
  before the voting.

• Your team of approx. 10 people has two team
  leaders who will represent the group to state
  your opinion. Then youll hear from the other
  side.
• Then you debate.
• Ill be the (hopefully) impartial chairperson to
  call the next speaker in your debate.

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Agenda for the debate

• The chair divides the whole room into four teams
  for each bill, there is one team for it and
  another against it. Ill appoint two team leaders
• You get a recent article paragraph taken from WSJ
  on whats going on of the two bills.
• You have 8 minutes to prepare -- read the article
  and discuss with your team members.
• The team leaders are responsible to take notes,
  summarize your team opinion, and present it. You
  can use the transparency if you like. Each team
  has a maximum of 3 minutes to present.
• YOUR GOAL convince the voters the teams on the
  other bill.
• Counter argument, discussion, and questions (from
  the voters) follow 10 minutes maximum.
• Then vote.

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Bill on Media Ownership Cap

• Pro team presents 3
• Con team presents 3
• Counter argument, questions, discussions 10
• Vote!

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Bill on Drug Import

• Pro team presents 3
• Con team presents 3
• Counter argument, questions, discussions 10
• Vote!

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Governing Legal Forces

• Federal Level
• State Level
• Local Level
• Self-regulation

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Examples of Fed. Regulatory Agencies

• Federal Trade Commission FTC...Governs commerce
• Federal Communications Commission FCC Governs the
  airwaves...Howard Stern etc.
• Food Drug Administration FDA...Governs new
  labeling law etc.
• Bureau of Alcohol and Tobacco ATF...Recent
  conflict with the marketers of ice beer focusing
  on alcohol content.

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Two categories of regulatory activities

• Economic regulation
• the control of rates and entry conditions in a
  given market
• Social regulation
• control externalities or exposures that imperil
  human health and safety, such as pharmaceuticals,
  workplace safety, product safety, and environment
  protection.

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Economic RegulationAntitrust Acts

• Sherman Act (1890) Competition...restraining
  trade and monopolizing markets
• Clayton Act (1914) Competition...limit specific
  activities, price discrimination, tying/exclusive
  agreements etc.
• Federal Trade Commission Act (1914) Created FTC
  Competition
• Robinson-Patman Act (1936) Competition
• Celler-Kefauver Act (1950) Competition...acquisiti
  on of competitors shares if...

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Social RegulationConsumer Protection - Acts

• Wheeler-Lea Act (1938) Consumer
  Protection...unfair and deceptive acts
• Consumer Goods Pricing Act (1975)
  Competition...price maintenance among mf. and
  resellers
• Trademark Counterfeiting Act (1980) Consumer
  protection, counterfeit goods
• Nutritional Labeling and Education Act (1990)
  Consumer protection...health claims, labeling May
  1994, marketers had to follow new guidelines for
  explaining the contents of products on labels
• Juice drinks...specify actual juice content

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Theories of Regulation

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Two standard economics theory schools of
regulation

• The public interest theory
• Public interest theory
• Populist theory
• The Chicago (capture) theory
• Chicago theory
• Public choice theory
  

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Public Interest Theory

• The objective of regulatory policy is to maximize
  economic welfare the sum of consumer and
  producer surplus
• Thus,
• market failure ? regulation
• the cost of regulation the transactions costs
  of repealing it the cost of market failure ?
  deregulation
• So, FDA regulate drug import in order to maximize
  consumer surplus and domestic pharmaceuticals
  profit

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Why Need Government Intervention?

• Distributional Inequities (distributive justice,
  health safety rights)
• Public Goods Externalities
• Decreasing Marginal Costs (Natural Monopoly)
• Market Imperfections, i.e. lack of access to
  information by consumers

Examples?
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The Populist Theory

• The objective of regulatory policy is to solely
  maximize consumer welfare. The policy doesnt
  reflect producer welfare, e.g. EPA (Environmental
  Protection Agency), FDA (Food and Drug
  Administration).
• FDA regulates drug import solely for the
  consumers good.

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The Chicago Theory

• Politicians use regulatory policy to maximize
  their vote share. Regulation has nothing to do
  with social welfare considerations. (Stigler and
  Peltzman)
• Thus, regulation is pursued when
• Campaign contribution vote contribution
  efficiency losses born by the general public
• FDA limit drug import in order to protect
  domestic pharmaceuticals, when campaign
  contribution from those firms and their vote
  contribution is larger than the loss of consumer
  welfare and industry efficiency.

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Public Choice Theory

• The coercive power of the state enables
  politicians to exploit regulatory policy solely
  for their benefit (Buchanan and Tullock).
• So, FDA only cares about FDA. Domestic
  pharmaceuticals are lucky to get some spillover
  benefit from the agency. They are lucky because
  FDA cant extract all the rents from regulation.

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Forms Organization of Regulation

• Price/Rate Regulation
• Standard Setting
• Licensing/Permitting
• Information Disclosure
• Economic Incentives (or desincentives)
• Marketable Property Rights

Examples?