Regulation

As embodied in administrative rules, public regulation is any attempt by the executive branch of government to implement statutory law controlling the behavior of citizens, business and nonprofit enterprises, and sub units of national or state/regional/provincial governments. In effect, public regulation is the government's attempt to limit the choices available to the regulated entity. The focus here, however, will be on the government's regulation of business enterprises and achievement of policy goals. In industrialized nations with democratic forms of government, the legislative branch enacts statutes that codify public policy. These statutes, or laws, are then executed by the executive branch or, in some cases by independent agencies, which implement the law through the development and codification process of administrative rule making. These administrative rules are used to guide agency oversight activities and to assess penalties against the regulated party for noncompliance. The judicial branch is responsible for ruling on the constitutionality of administrative rules or legislative intent in the law. It does not have to be an “all-or-nothing” judicial decision, as sections of a regulation may be judicially upheld or struck down.

There are two approaches to analyzing business regulation: positive and normative analysis. Positive analysis examines when and what type of business regulation will occur, while normative analysis asks when government agencies should intervene in private markets. It is normative analysis that presumes government intervention is required in cases where competitive markets do not exist to an optimal level, resulting in “market [Page 1353]failure” allocating resources inefficiently In the public interest, political leaders will subsequently intervene to correct this market failure by enacting laws and codifying and implementing public regulations.

Market failure conditions exist when (1) negative externalities occur, a condition when business transactions create uncompensated costs for third parties, including abuses of “public goods” such as common natural resources, or negative internalities, where the regulation of product quality or workplace safety, for example, are not reflected in market exchanges; (2) there are natural monopolies, such as public utilities, when economies of scale are of such a magnitude (also referred to as an “entry barrier”) that a market can be serviced at the lowest cost only if production is limited to a single product; and (3) when market participants have inadequate information for markets to allocate resources efficiently. There is also a moral rationale for instituting business regulation. Elected representatives may put forth utilitarian fairness and justice ethical rationales to establish health and safety standards of behavior to protect employees, consumers, and other stakeholders.

“Public choice” economics provides another perspective on the normative analysis of public regulation. According to the public choice perspective, government officials, elected officials, and those in the executive branch and interest groups (including the business community) pursue their private interests in the regulatory arena with the same enthusiasm they individually display in the private market arena. Therefore, the pursuit of public regulation should be recognized as nothing more than an effort by government officials and interest groups to use public authority to redistribute income from one interest group to another, maximizing private gain at the expense of others. According to the public interest perspective, any benefits accruing to private groups from lobbying efforts to obtain these regulatory rents should not be considered as a subversion of the democratic process, but only as a reflection of the nature of the regulatory process.

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