Regulation and Regulatory Agencies

Regulation has been defined broadly as the intentional restriction of a subject's choice of activity by an entity not directly party to or involved in that activity. In its most familiar form, regulation concerns restrictions placed by government on activities in the private sector (although government may also regulate itself). Normally, government acts as an agent for its citizens and, as such, is obligated to give account of its actions. Hence, regulation, as well as other government actions, is normally accompanied by a formal rationale, though the content of the rationale may range from substantive to purely symbolic in character. There are many possible forms for this rationale, but it is generally given the label of “the public interest.” Hence, regulation can be defined more narrowly as the public administrative policing of a private activity with respect to a rule prescribed in the public interest.

As discussed later in this entry, regulation that is formally rationalized as in the public interest may in fact be the result of a societal group obtaining government protection that steers benefits to the members of the group. Thus, the existence of a public interest rationale for regulation does not necessarily mean that the primary actual purpose of the regulation is to provide general public benefit. Government regulation can be a valuable prize that reduces competition, guarantees enhanced incomes, discriminates against open participation in activities, and so on. Indeed, one of the classic reasons for the existence of government is to provide a legitimate mechanism for the coercive resolution of disputes. Whoever can harness that coercion to serve particular economic and social ends can reap enormous windfalls.

Regulation is traditionally divided into economic and social regulation. Economic regulation includes the regulation of market transactions, restrictions on the behaviors of firms and on the behaviors of individuals within firms and markets, regulations on financial and trade practices in particular industries and in commerce at all levels, including international trade, and so on. Social regulation is concerned with the impacts of economic and social practices on people and on the natural environment; it is sometimes labeled “protective” regulation. Such regulation can be aimed at reducing pollution, protecting consumers from physical harm from the use of consumer products, ensuring the safety of drugs, keeping the workplace safe, assuring safety in the performance of motor vehicles, eliminating discrimination in employment on such grounds as gender, race, age, or disability, and so on.

There are several standard rationales for regulation in the political economy literature. For economic regulation, these include, among others, the control of cutthroat competition (selling below cost) and other forms of “unfair competition;” the control of monopoly power, especially that arising from so-called “natural monopolies;” the existence of unequal bargaining power and of excessive transaction costs in markets; and the control of economic rents, in which firms possess cost advantages over what prevails in the market by being able to exploit their control of local supply due to technological, legal, situational, or other factors. For social regulation, these rationales include the control of externalities, the unintended by-products of market activities, such as pollution; information, incentive, or public goods problems that are judged to require rebalancing interventions by government; and other public policy concerns where the market works but produces outcomes that are socially unacceptable.

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