10 471.23 Fall 2013

1. BG 10 471.23 Fall 2013

2. Regulation Law, Economics, & Politics Baron ch 10

3. late 1800s Populist era 1930s Progressive era the New Deal 1960s… social regulation 1970s… econ deregulation 2010s… ? Times of change

4. Main Fed Bodies • 1913 Federal Reserve System • 1914 Federal Trade Commission • 1916 International Trade Commission • 1930 Federal Energy Regulatory Commission • 1931 Food & Drug Commission • 1934 Securities & Exchange Commission • Federal Communications Commission • 1935 National Labor Relations Board

5. Main Fed Bodies • 1948 Federal Aviation Administration • 1961 Federal Maritime Commission • 1965 Equal Employment Opportunity Commission • 1970 Environmental Protection Agency • National Highway Traffic Safety Administration • 1972 Consumer Product Safety Commission • 1973 Occupational Safety & Health Administration • 1975 Nuclear Regulator Commission

6. Types of Interventions • Controlling prices • Setting floor prices • Providing for solvency • Controlling # of market participants

7. Types of Interventions • Establishing service territories • Providing product information • Rationing common pool resources • Allocating public resources • Controlling “unfair” international trade

8. Types of Interventions • Mandating product characteristics & tech • Establishing performance standards • Requiring premarketing approval • Ensuring product safety • Controlling toxic emissions & other pollutants

9. Types of Interventions • Ensuring equal opportunity • Regularizing employment practices • Specifying qualifications

10. Structure • Why regulation? • “theory” of market imperfections • natural monopoly • externalities • pecuniary vs. nonpecuniary • approaches • moral hazard • public goods • asymmetric information • government imperfections • capture “theory” • rent-seeking “theory” • political “theory” • What do regulators do? • Command & Control • Incentives • Persuasion

11. Why regulation? • regulation has always existed If a merchant give an agent corn, wool, oil, or any other goods to transport, the agent shall give a receipt for the amount, and compensate the merchant therefor. Then he shall obtain a receipt from the merchant for the money that he gives the merchant. Code of Hammurabi (para. 104) ca. 1750 BC

12. Why regulation? • in the US • utilitarian rationales dominate • “theory” of market imperfections • capture “theory” • rent-seeking “theory” • political “theory” • Language for public consumption & for regulatory consumption differs.

13. Why regulation? • theory of market imperfections • saving capitalism from itself We have always known that heedless self-interest was bad morals; we now know that it is bad economics. FD Roosevelt

14. Why regulation? • theory of market imperfections • wealth not maximized • inefficient allocation of • resources • money • labour • not: market does “bad” things

15. Why regulation? • kinds of market imperfections • natural monopoly • externalities • moral hazard • public goods • asymmetric information • government imperfections

16. likely if economies of scale almost certain if 1 economic agent can produce more cheaply than 2 controversial necessarily bad? inevitable? durable? Natural Monopoly

17. Why regulation? • “theory” of market imperfections • natural monopoly • externalities • pecuniary vs. nonpecuniary • approaches • moral hazard • public goods • asymmetric information • government imperfections • capture “theory” • rent-seeking “theory” • political “theory”

18. Externalities • actions affecting others not engaged in • decision • transaction • 1 • pollution • multiple • rent property for noxious use

19. Externalities • can be either • harmful • I store a junk car in my front yard • beneficial • I put art in my front yard • http://www.flickr.com/photos/grapejuicegirl/190714506/

20. pecuniary affect through changes in prices of goods & services nonpecuniary affects preferences production opportunities of economic agent(s) city folk buy all the houses in my quaint little town as weekend retreats intervention? if negative then maybe hog producer sets up barn right beside my bed and breakfast in that quaint little town intervention? if negative then usually Externalities

21. Externalities • responses • enviro-levy • command-and-control regulation • incentive approaches • attempt being made to • change from nonpecuniary to pecuniary • change from externality to internality

22. Externalities • The Tragedy of the Commons • http://www.sciencemag.org/sciext/sotp/commons.dtl • For that which is common to the greatest number has the least care bestowed upon it Aristotle Politics 2:3

23. Externalities • The Tragedy of the Commons • For that which is common to the greatest number has the least care bestowed upon it Aristotle Politics 2:3

24. Why regulation? • “theory” of market imperfections • natural monopoly • externalities • pecuniary vs. nonpecuniary • approaches • moral hazard • public goods • asymmetric information • government imperfections • capture “theory” • rent-seeking “theory” • political “theory”

25. Moral Hazard • similar to an externality • people don’t bear full cost of actions • seat belts • building on a flood plain • a bank making risky investments

26. Why regulation? • “theory” of market imperfections • natural monopoly • externalities • pecuniary vs. nonpecuniary • approaches • moral hazard • public goods • asymmetric information • government imperfections • capture “theory” • rent-seeking “theory” • political “theory”

27. Public Goods • “consumption” by 1 doesn’t prevent consumption by another • national defense • radio broadcasts • street lights • Who will pay? • Who will do it?

28. another buyer knows more than you so they can buy for less seller doesn’t get maximum price seller knows more than buyer buyer gets less value alternative purchase prevented Asymmetric Information • insider trading • seniors & home repair • car repair • house sales • drugs

29. Asymmetric Information • especially a problem if info is costly • usual solution • forced disclosure

30. Government “imperfections” • …government is not the solution to our problem; government is the problem. Ronald Reagan 1st Inaugural Address 1981

31. Why regulation? • “theory” of market imperfections • natural monopoly • externalities • pecuniary vs. nonpecuniary • approaches • moral hazard • public goods • asymmetric information • government imperfections • capture “theory” • rent-seeking “theory” • political “theory”

32. Why regulation? • capture theory • measures initially taken • because of market imperfections • over time • measures evolve to benefit regulated entities • broadcast regulations

33. Why regulation? • capture theory • rent-seeking theory • regulations established to benefit politically effective interests • railroads

34. Why regulation? • capture theory • rent-seeking theory • political theory • all interest groups seek regulation to serve their interests • laws governing unions

35. Why regulation? • theory of market imperfections • capture theory • rent-seeking theory • political theory • In US, utilitarian arguments are the least controversial.

36. Influences on Regulators

37. What do regulators do? • Command & Control • Incentives • Persuasion

38. Command & Control • Regulators • order engineering controls • scrubbers for coal-fired electric power plants • or require the best available tech • for pollution abatement

39. Incentives • Take into account • benefits • costs • of attaining environmental objectives • Align • social costs • private costs • of pollution and its abatement

40. Incentives • tradable permits system • aka cap-and-trade systems • max total allowable set • issue permits (entitlements) • for that amount • allow permits to be traded • gradually reduce total

41. Persuasion • shaming • shaping • information • Finance Minister Jim Flaherty suggested Monday some banks will make changes to how they charge fees for their automated banking machines. • CBC

42. Business & the Environment • EPA • Enviro Politics • NIMBY • Voluntary Programs • Social Efficiency • Coase Theorum

43. EPA • Environmental Protection Agency • “independent” agency • in executive branch • budget • $7.8 billion in 2005 • 18,000 employees • administrator • appointed by President • confirmed by Senate

44. Insecticide, Fungicide & Rodenticide (72, 88) Clean Air (70, 77, 90) Solid Waste Disposal Air Enviro Policy Water (72, 74, 77, 87) Enviro Pesticide Control Endangered Species Safe Drinking Water 76 Toxic Sub Control (88) 76 Resource Conservation & Recovery 80 Superfund Comprehensive Environmental Response, Compensation & Liability Emergency planning & Right-to-Know Ocean Pollution 90 Pollution Prevention 90 Oil Pollution 92 Reclamation Projects 96 Food Quality Protection EPA Responsible for admin major enviro acts

45. e.g.: Superfund • cleanup existing toxic waste disposal sites • ~ 20,000 • ~ $600 b • attempts to • identify source of dumping • force it to clean site • criticism: • “retrospective liability”

46. EPA “Activism” • Internet • send info to citizens & local groups • focus on possible health risks • children • more than enviro effects • use other laws

47. Enviro Politics • complex • scientific uncertainty • causes • consequences • incomplete info • costs • benefits • long timelines

48. Enviro Politics • motivated by • distributive consequences • normative perspectives about • protection of environment • health

49. Enviro Politics • contentious • jurisdiction • fed/state • between countries • reason for action • utilitarian vs. values-based • time • “But what about the children!?”

50. Enviro Politics • contentious • disagreements • alternative approaches • liability vs. regulation • value of protection • significant economic consequences • profits • jobs • trade