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14reg_sg - Chapter 14 Regulation Chapter 14 Regulation...

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Chapter 14: Regulation Chapter 14 Regulation CHAPTER SUMMARY The marginal benefit of an item may diverge from the marginal cost for three basic reasons: market power, asymmetric information, and externalities and public goods. This divergence results in economic efficiency. Government regulation may help where private action fails to resolve the economic inefficiency. Generally, the government can regulate the conduct, information, and structure of an industry. Specifically, the conduct of a franchised monopoly may be regulated directly through price or indirectly through the rate of return. Competition law regulates the conduct and structure of businesses in general. In situations of asymmetric information, mandatory disclosure is one form of regulation. Externalities may be regulated through fees or standards. The efficient degree of an externality depends on location and time. The government can help to resolve inefficiency in accidents and public goods by providing an appropriate legal framework. The laws regarding copyrights and patents must balance the incentive for new research against inefficient use of existing knowledge. KEY CONCEPTS natural monopoly rate base privatization self-regulation managerial cost-pricing law of torts average cost pricing liability GENERAL CHAPTER OBJECTIVES 1. Analyze how government regulation can resolve the economic inefficiency arising from monopoly and monospony. 2. Distinguish a natural monopoly from a potentially competitive market. 3. Analyze how government regulation can resolve the economic inefficiency arising from asymmetric information. (c) 1998-2001, I.P.L. Png & C.W.J. Cheng 1
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Chapter 14: Regulation 4. Analyze how government regulation can resolve the economic inefficiency arising from externalities. 5. Analyze the legal framework for resolution of the economic inefficiency in the provision of public goods. NOTES 1. Economic inefficiency and government regulation . (a) Divergence of marginal benefit and marginal cost. i. Market power. ii. Asymmetric information. iii. Externalities and public goods. (b) Government regulation. i. Conduct. ii. Information. iii. Structure. 2. Natural monopoly . (a) Natural monopoly is a market where: i. The average cost is minimized with a single supplier, e.g., distribution of electricity and water. ii. A market is a natural monopoly when economies of scale or scope are large relative to market demand. (b) Two philosophies for management of a natural monopoly. i. Government ownership/provision . A government-owned enterprise tends to be relatively inefficient. (1). More prone to be beholden to employees, high wages and over staffing, resulting in higher costs. (2). Dependence on the government for investment funds. ii. Privatization : Privatization is the transfer of ownership from the government to the private sector. A private exclusive franchise awarded to a commercial enterprise, subject to government regulation. A government enterprise may be privatized and remain a monopoly, so that there is no competition on the seller side.
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