UNIT 5 GOVERNMENT

REGULATION IN THE
ECONOMY
Structure

5.0 Objectives
5.1 Introduction
5.2 Rationale for Regulation
5.2.1 Fundamental Theorems of Welfare Economics
5.2.2 Government Intervention on Public Interest

5.3 Nature and Relevance of Regulation

5.4

Policy Instruments for Regulation

5.4.1 Price-Cap Regulation
5.4.2 Revenue Cap Regulation
5.4.3 Rate of Return Regulation
5.4.4 Benchmarking

Externalities and the Private Sector

5.6 Effect of Regulation
5.7 Let Us Sum Up
5.8 Key Words
5.9 Some Useful BooksIReferences
5.10 AnswersIHints to Check Your Progress Exercises
5.5

5.0 OBJECTIVES
After going through this unit, you will be able to:
explain the need for regulation in an economy;
explain the nature of regulation;
identifjr the policy instruments available for regulation; and
appreciate the effects of regulation in an economy.

5.1 INTRODUCTION
In the previous unit we learnt that there could be situations, largely due to
market failure or missing markets, where the neoclassical tools of analysis do
not lead to efficient allocation of resources. Apart from the above, there are
several situations where market exists and lead to efficient allocation but in a
highly inequitable manner. In such situations government intervention in the
market is necessary. The concern in such cases is on the ground of equity
rather than efficiency. The nature and extent of government intervention,
however, varies across countries. Moreover, for the same country, the nature

and extent of government regulation has undergone radical changes over time.
Issues of privatization of airline industry, power generation, foreign
participation in retail trading, and many others, are highly debated not only in
political circles but also at intellectual levels. We discuss in this unit some of
the issues related to the rationale, instruments and effects of economic
regulation.

RATIONALE FOR REGULATION

I
:

Basically there are two theories for government regulation, viz., market
failure and public interest. Market failure occurs when there are externalities
in the production process. In the presence of externalities the exclusion
principle may not hold entirely. Moreover, the market mechanism cannot
capture externalities and the production is not at socially optimum level (see
the previous Unit). As private sector does not find it profitable to carry out
production of commodities with positive externalities, there is a need for
government intervention. In fact, in the case of pure public goods there is a
strong case for government production.
There are certain situations where excludability features apply and there is
market for the commodity under consideration. According to the public
interest theory, it is in the interest of general public that the government
should intervene in the market. We look into situations that warrant
government regulation on grounds of public interest. Before that we briefly
state the fundamental theorems of welfare economics without proof (see
MEC-001: Microeconomic Analysis for details on these theorems).

5.2.1 Fundamental Theorems of Welfare Economics

There are two fundamental theorems of welfare economics. The first
fundamental theorem of welfare economics states that any competitive
equilibrium leads to efficient allocation of resources. Thus Pareto efficiency is
realized when perfect competition prevails in the market. If Pareto efficiency
prevails in the economy it is not possible to increase total social welfare - it is
not possible to someone better off without making another person worse off.
Thus the first fundamental theorem of welfare economics makes a case for
non-intervention in the market. The theorem confirms the proverbial
'invisible hand' mentioned by Adam Smith and points out that the market, if
left to itself, will automatically achieve efficiency.
The second fundamental theorem of welfare economics, however, contradicts
the first theorem. According to this theorem, efficiency is not the only thing
the society should care about. Pareto efficiency, as you may recall from MEC001, can take place even when there is extreme inequality in distribution of
resources. In terms of the Edgeworth box, equilibrium can take place towards
a comer, not necessarily at the middle of the contract curve. Of the several
efficient outcomes, the desired one (with lesser inequality) can be achieved by
making a one-time transfer of wealth from the rich to the poor and then
leaving it to market conditions. Therefore, the second theorem suggests the
need for government intervention. The theorem, however, is silent on how the
transfer of wealth from the rich to the poor should take place. The option
before the government is to impose taxes on the rich. As you know from the
basic tenets of taxation, it has to be a lump sum transfer; imposition of
proportional taxes would distort prices and output. Secondly, for carrying out

Government Regulation in
the Economy

Society Beyond Market

the extent to which transfer should take place, the government should havc
perfect information on consumer preferences and firm's production function.

5.2.2 Government Intervention on Public Interest

Having stated the need for equity on grounds of social welfare lets us bring
out the situations under which government intervention is necessary.
a)

Imperfect Competition: The presence of market power in a producer

leads to impedect competition in the market. You may recall that under
perfect competition price is equal to marginal cost (P = MC) while in
the presence of monopoly power, price is higher than marginal cost
(P > MC) . Thus perfect competition is considered as an ideal condition
and any deviation from it is seen as a loss of social welfare.
Monopoly is natural in certain firms (such as electricity supply) where
economies of scale are present throughout (or at least for a longer
stretch). It implies that the average cost curve is downward sloping and
does not turn upward after reaching a minimum level. In such a situation
the necessary condition for equilibrium of the firm, that is, MR = MC. is
satisfied. However, the sufficient condition that MC must have a
positive slope is not fulfilled. It indicates a hypothetical situation whcrc
higher the output, lower is the average cost. The presence of two or
more firms in the case of natural monopolies would lead to increase in
cost of production. Secondly, the presence of monopoly power may
prompt the firms to discriminate among buyers. The above argument
forms a basis for imposition of controls on monopoly firms. Thirdly, in
certain cases competition among firms is possible but the firms form
cartels to avoid competition. In order to curb monopoly power thc
government imposes various controls on production technology, prices
and distribution of output.

b)

Externalities: Externalities implies inadequate expression of costs or

benefits in prices and economic decision-making. There are several
examples of externalities, both positive and negative, around us. In all
the cases there is no incentive on the part of the economic agent to
restrict hislher equilibrium production/consumption to the socially
optimum level. In the presence of externalities the economy produces
less of what it should produce and more of what should not produce!
For goods with positive externalities social benefit is higher than private
benefit. Thus social optimum is at a higher level than the equilibrium
achieved on the basis of private benefit. On the other hand, for goods
involving negative externalities private cost is lower than social cost.
Thus equilibrium realized on the basis of private cost is higher than
social optimum.

c)

Common property resources: The property rights are not defined in

the case of common property resources. These goods thus are overexploited and degradation begins. Forests get denuded, common grazing
land gets eroded, and air and water bodies get polluted due to
production and consumption activities. The tragedy of commons and
free riders problem are described in Unit 11 of this Course.

d)

Transaction costs: One of the basic assumptions under perfect

competition is the availability of complete information on the part of
both the parties entering into a contract or transaction. Procurement of

'

information, however, involves costs, which is ignored in traditional

economic theory. Transaction costs such as search, measurement,
inventory, and decision-making costs important. Traditional economic
theory, however, assumes away these costs on the garb of perfect
information. Secondly, once a contract is undertaken, its enforcement
and litigation (in the event of breach of contract) should also be
considered while deciding on costs of production. If these costs are not
taken into account socially optimum output and consumption levels
cannot be achieved.
e)

Asymmetric information: In certain cases there is asymmetric

information available to the contracting parties. For example, purchase
of a second hand car or purchase of life insurance policies. While
purchasing a second hand car, obviously the owner/seller have better
access to information about the car than the buyer. Similarly, while
purchasing life insurance policy the insured knows better about hisfher
health than the insurance company.

f)

Adverse selection: Asymmetric information may give rise to 'adverse

selection'. It it refers to a market process in which bad results occur due
to information asymmetries between buyers and sellers. Let us explain it
by an example from insurance. As a result of private information, the
insured are more likely to suffer a loss than the uninsured. For example,
suppose that there are two groups among the population, smokers and
non-smokers. As the insurer selling life policies cannot distinguish
between the two, the benficiariies pay the same premium. Non-smokers
are likely to die older than average, while smokers are likely to die
younger than average. So the life policy is a better buy for the smokers.
The insurance company anticipates or learns that the mortality rate of
the combined policy holders exceeds that of the general population, and
sets the premiums accordingly. The outcome is that the non-smokers are
at disadvantage as they have to pay relatively higher premium. They
'may go uninsured though if they could buy a policy on terms that are
actually fair given their characteristics, they would do so. So market
failure is involved.

g)

Organizational failures: In economics, the problem of motivating one

party to act on behalf of another is known as 'the principal-agent
problem'. The principal-agent problem arises when a principal
compensates an agency for performing certain acts that are useful to the
principal and costly to the agent, and where there are elements of the
performance that are costly to observe.

5.3 NATURE AND RELEVANCE OF

REGULATION
Government regulation in an economy has been quite v ~ depending
d
upon
the nature of commodity or activity in question and prevailing business
environment. Basically there are two types of policies that the government
t'ollows: i) command and control measures, and ii) market-based incentives.
In command and control measures there is . a uniform yardstick for all
economic agents. For example, in India prior to 1991 there were so many
restrictions to set up an industrial unit. One had to obtain a license to produce,
-.

Government Regulation in
the Economy

Society Beyond Market

or expand scale of operation, or raise resources. This gave rise to failure in

governance as corruption took place all spheres. As the government had to
issue licenses to the producers, there was rent seeking from the government
machinery and for any investment project the execution process got delayed.
The government had controls in one way or another on the type of inputs to
be used in production, the nature of technology to be adopted, the commodity
mix for firms producing more than one goods, and general guidelines on
prices to be followed. The ills of such policy measures are well documented
in the literature - the Indian producers remained isolated from technological
progress taking place outside; there was slackness in industrial productivity;
product quality did not improve; as Indian products could not compete abroad
(and earn foreign exchange) there were restrictions on imports to conserve
foreign exchange. In the agricultural sector, the government subsidized inputs
such as seeds and fertilizer so that farmers get the benefit and production
increases. Through a massive public distribution system the government
procured food grains so that farmers get remunerative prices and consumers
get essential food items at cheaper price. In the process, as the gbvernment
procured food grains at a price higher than market rates and sold at a price
lower than market rates, there was a huge drain on government exchequer.
Subsidies on both input and output kept on increasing. Consequently, minimal
bfnds were available for infrastmctural develops in agriculture such as rural
roads, corrGmunicationand irrigation facilities. This stifled agricultural growth
rate in the long run. The public sector assumed a key role not only in
regulating the economy but also in production of goods and services. There
was massive investment on direct production of goods and services. Not only
that, sick units in the private sector got nationalized on the logic of protecting
employment for the workers. Thus no major loss-making unit was allowed to
close down. If we look into the share of public sector GDP, it increased from
about 10 per cent of GDP in the year 1960-61 to around 25 per cent of GDP
by the year 1991.
In 1991 the economic liberalization brought in a wind .of change. Licensing
policy got abolished except for very few hazardous and strategic items. No
permission was required to expand capacity or change location of the plant.
Rules regarding mergers and acquisitions got simplified. The producers could
import inputs as well as technology. Restrictions on foreign exchange and
foreign collaboration got liberalized over the years. The control of the
government on financial resources got substantially reduced as stock market
emerged as analternative some o f bfnding to the commercial banks. Public
sector units, which were incumng losses, were sold to the private sector so
that they can be revived. On the whole there was deregulation of the economy
and private sector got a key role to play in economic growth. The share of the
public sector did not rise further and continued to remain at around 25 per
cent of GDP.
From the above we make two observations. First, regulation can be seen as a
process. It continues over time and changes according to need of the hour and
perception of the policy makers. Secondly, regulation is often seen as a red
tape. It leads to poor governance and provides scope for corruption. Thus, in
recent years there is a process of de-regulation operating world over. Both
developed and developing countries have modified their policy towards
economic liberalization. There is emphasis on free trade of goods and
services. In western Europe, particularly the European Union (EU).
geographical boundary of a country has become meaningless. There is a
common currency and free movement of not only goods and services but also

of labour across member countries of EU. The process, popularly called

globalization, has minimized the role of the government. Market mechanism
has come to the forefront over government regulation.
In the above scenario the relevance of government has taken a different
outlook. The market mechanism has brought in competitiveness to the
industry. Firms equipped with better technology and better quality products
are coming up everyday. Economic growth has accelerated and there is a
general atmosphere of optimism around us. However, market mechanism and
the process of change have not been able to take care of problems such as
poverty and inequality. The rich have grown richer while the income levels of
the poor have not witnessed much increase. As we know from Block 1. these
two problems continue to hound us and a major chunk of India's population
remains in abject poverty. Most of them are uneducated and work in
agricultural sector. They do not have any social security backup such as
health insurance, pension benefits and secured source of earning. If all
production and distribution activities are left to the market forces these
segments of society cannot fend for themselves. There is still a need for
,government intervention in the economy.
Government regulation on pricing by monopoly firms could be effected
through the government administration directly or there could be a separate
regulatory body established for the purpose. We will discuss on the policy
instruments available to the government on price fixation of monopoly
products in the next section. Here we discuss another form of government
intervention in the market which is not necessarily a measure against control
of monopoly power. We point to the 'price smoothing mechanism' by the
government. Sharp fluctuations in prices of essential commodities can have a
greater impact on the economy. In order to avoid sharp and abrupt
fluctuations in prices the government intervenes in the market by selling or
purchasing the commodity. Alternatively the government can issue guidelines
to firms and specify the range within which price can change. The objective is
to reach the market determined equilibrium prices, but in a gradual manner.
In order to explain the nature of price smoothing we give some examples
from Indian situation. The prices of essential food products have greater
repercussion in the economy. One of the objectives of public distribution
system is to stabilize prices in the market. When there is a shortage of an
essential commodity, say wheat, in the market the government releases extra
stock of wheat so that its price does not rise sharply. Similarly during the
harvest season the prices are likely to fall. At that point the government enters
into the market and purchases the commodity so that supply is reduced to
some extent and farmers get remunerative prices. Similarly the government
enters into foreign exchange market and makes selling or purchases of foreign
currency so that exchange rate does not fluctuate sharply. Price smoothing is
not limited to important commodities alone. The government is seen selling a
not so important commodity as onion in India at times!
A third example we can cite is the prices of petroleum products. During the
recent oil crisis when global prices of crude oil increased manifold, the
government intervened in the market. It specified the range within which
price of petrol and diesel can be increased although pricing of petroleum
products are supposed to be determined by market forces.

Government Regulation in
the Economy

Society Beyond Market

Check Your Progress 1

1)

Explain the implications of the fundamental theorems of welfare

economics.

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2)

Discuss situations where government regulation is required.

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5.4 POLICY INSTRUMENTS FOR

REGULATION
Regulation can take many forms ranging from general guidelines to total ban
on an activity; and can be on use of inputs and technology, marketing
operations, financing and pricing. In many cases regulation is not sensitive to
changing market conditions. In pricing of product, however, the nature of
regulation is quite important. As we observed earlier, monopoly retains the
potential to exercise its market power and charge higher prices. Governments
have devised means of controlling monopoly prices over the years. There are
four approaches to regulating the overall price level in an economy, viz., price
cap regulation, revenue cap regulation, rate of return (or cost of service)
regulation, and bench-marking (or yardstick). In India we see many regulatory
bodies for fixing prices of products, particularly of services. Thus we have
Telecom Regulatory Authority of India, Central Electricity Regulatory
Commission, and so on.

5.4.1 Price-Cap Regulation

Price cap regulation is designed to protect the consumer from excessive price
increase by producers. At the same it provides an incentive for firms to reduce
costs of production. Price cap regulation is widely prevalent across countries,
both developed and developing.
The price cap regulation is also called 'RPI-X regulation'. It allows the firm to
increase its price level according to the rate of inflation. The regulator takes
an index which represents an inflation measure (in symbol I) and productivity
offset (X). The regulator usually fixes the price of the goods or services by
constructing an index (I-X). The price index (I) could be the average increase
in prices of a comparable basket of goods and services. The X-efficiency
could measure productivity increase in the firms.

5.4.2 Revenue Cap Regulation

Revenue cap regulation is similar to price cap regulation in the sense that the
regulator establishes an I-X index, which in this case is called revenue cap
index. It allows the firm to change prices so long as the percentage change in
revenue does not exceed the revenue cap index. Revenue cap regulation is
more appropriate than price cap regulation in situations where costs do not
vary appreciably with unit of sales. For example, for electricity supply the
major cost is distribution lines. Once the distribution lines are provided,
increase in supply of electricity to one more household in the colony does not
increase cost remarkably. Revenue cap regulation also does not require
monitoring of prices; to see whether the service provider is over-charging or
not.

5.4.3 Rate of Return Regulation

The rate of return regulation adjusts overall price levels according to the
firm's accounting costs and investment. In most cases, the regulator reviews
the costs to examine the claim by the firm that it is receiving less than its cost
of capital. It can also review the assertion by a group of consumers the actual
rate of return is higher than the cost of capital.

The rate of return regulation is criticized on the ground that it encourages

cost-padding and if the allowed rate of return is too high it encourages
adoption of an inefficiently high capital-labour ratio. This is called AverchJohnson effect. Rate of return regulation was prevalent in the US for many
countries. With deregulation setting in, however, the rate of return regulation
is not in use these days; the price-cap and revenue cap regulations are found
to have better incentives for firms.

5.4.4 Benchmarking

In benchmarking, a firm is compared to similar firms in other markets while

fixing prices. On the basis of relative cost efficiency rewards or penalties are
given to the firm. The firm is expected to perform at par with other firms in
similar conditions. Here the difficult task is identification of similar firms as
the markets are different. Statistical techniques are used while comparing the
performance of firms so that control for dissimilar variables can be taken into
account.
f h e central idea in price regulation is that monopoly firms should charge the
prices that would prevail in a competitive market. We find several instances
around us where the firm has to take approval of the regulator by before
changing its prices. For example, any change in the cost of telephone services
in India has to be approved by TRAI.

5.5 EXTERNALITIES AND THE PRIVATE

SECTOR
Traditionally the performance of the private sector in situations involving
externalities is viewed with suspicion. In cases involving positive externalities
the private sector does not produce much and in the presence of negative
externalities it produces more than optimum. In the case of infrastructure
where the rate is return is too low in the short run and it is not possible to

Government Regulation in
the Economy

Society Beyond M a r k e t

capture the spillovers the private does not venture usually. In order to control
production of goods with negative externalities the government in traditional
approach imposes restrictions of finns while it entered into production goods
with positive externalities. In recent years, however. some changes are
. observed in the sense that private sector has ventured into areas hitherto
considered as the domain of the public sector. Moreover, situations involving
negative externalities are viewed as a source of revenue.
Let us take the example of entry of private sector into development of
infrastructure such as roads. We consider two situations: first related to short
stretches in busy metropolitan cities, and second related to highways.
Investment in short stretches of roads in busy metropolitan cities is now
perceived as a profitable investment by the private sector. The private sector
builds the road segment (e.g., a bridge over a river), and operates by charging
a stipulated tool charge from users. As the traffic is too high. it is profitable
for the investor. In some cases the builder pays a lump sum to the government
as a license to operate on this road segment. Thus. what was considered
earlier as expenditure by the government is now a source of revenue for the
government. In the long distance road sector, the private sector is assured of a
minimum rate of return on investment.
We consider another situation where the government used to impose uniform
restrictions on private sector as it involved negative externalities. As an
example let us consider the case of environmental pollution. Producers of a
polluting good would dump the effluents to the river or the sea. As a result,
the water downstream or on the seacoast would get polluted. The adverse
effect of the polluting activities often prompted the government to impose
restriction on production of polluting goods or shifting of polluting activities
away from residential areas. Social buds such as pollution reduce the cost of
production for the producer, which influences the producer to produce at a
level higher than the social optimum. In recent years, there is a shift in policy
from command and control measures to market based incentives. Thus instead
of imposing a blanket ban on polluting activities, the government collects
certain amount of pollution charge from the polluting units (see Unit 9 for
more on MBIs). The objective is to increase the cost of production so that
polluting goods are produced at socially optimum level. In the process,
however, the government generates revenue which can be used for pollution
abatement or for other productive activities. Thus there is 'double divided' reduction in pollution and generation of revenue - from such a policy.

EFFECT OF REGULATION
It is difficult to comment whether regulation is good or bad. The studies on
the effect of regulation have mostly been on a case-to-case basis. The fact that
government regulation in has declined over the years points to the limitations
of regulation. We have mentioned earlier about the problem of red-tape and
corruption in economies pursuing command and control policies. The
liberalization measures in China appear to have yielded results and- the
Chinese economy is growing at a very high rate for several years now. The
disintegration erstwhile USSR also points to the deficiencies in controlled
economies.
The rationale behind traditional theory of regulation is that it serves public
interest by correcting some form of market failure, typically natural

monopoly. The public interest theory, however, is based on the assumption

that perfectly informed decision makers are either managing the regulation or
running the regulated firms. Such an assumption may not hold in many cases.
Averch and Johnson (1962) attacked the public interest theory by putting
forth the view that there is an incentive on the part of the regulated firms to
distort their input choices. Their results gave rise to the famous AverchJohnson effect, according to which if there is a rate of return regulation then
firms adopt capital-intensive production technology even though labour is
available in abundant supply. Empirical study on the Averch-Johnson effect
by Joskow and Noll (1 98 1 ) was inconclusive regarding the presence of such
behaviour. Some other studies, however. lend support to the Averch-Johnson
effect thereby challenging the public interest theory.
The government usually functions through a regulatory body to regulate
monopoly prices. Often the regulatory serves the interest of the industry
group as members of the body have affiliation or some bias towards the
industry. Often pressure groups such as industries associations or political
interference help in fulfilling the interest of the industry. Such a situation is
tenned 'regulatory capture' as decision-making authority is captured by
others.
It is often argued that regulation has adverse consequences and thus should be
minimal. In line with the classical economists it is suggested that the role of
the government should be limited to protection of life, liberty and property of
individuals. Government should not diminish individual autonomy and
responsibilities in order to rectify market failure.
Second, regulation is seen as a problem itself. According to this line of
thought, regulation tends to bring in more regulation. In the Indian industries
context. as we mentioned earlier, the government of India imposed
restrictions on imports of several commodities during the 1970s to conserve
foreign exchange. The Indian producers were not in a position to compete
globally. Thus exports were minimal. The restrictions on the import of capital
goods adversely affected productivity of industrial sector.
Thirdly, in the process of regulation, there are some negative consequences in
addition to the originally intended objectives. Thus a regulation brought in to
cure a problem of 'market failure' could give rise to a problem of 'policy
hilure'. Let us take certain examples from the Indian scenario. In order to
increase agricultural production the government provided subsidized inputs
such as HYV seeds, chemical fertilizers and pesticides. In order to bring in
mechanization of agriculture there was subsidies on inputs such as tube wells
and electricity. As output increased in certain pockets of the country, the
government purchased food grains at higher prices so that farmers get
remunerative prices. In the process two problems came up. First. there were
severe environmental problems: tube wells dried up due to excess drawing up
of ground water. water table got depleted, and fertility of land declined.
Second, due to provision of excessive subsidies, adequate funds for capital
formation in agriculture were not available. This hampered growth rate of
agriculture in the long run.

Check Your Progress 2

1)

Critically examine the effect of regulation in an economy.

Government Regulation in
the Economy

Society Beyond Market

2)

Write short notes on the following:

a)

Regulatory Capture

b)

Price-Cap Regulation

c)

Price Smoothing

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5.7 LET US SUM UP

There are several situations where market exists and lead to efficient
allocation but in a highly inequitable manner. In such situations government
intervention in the market is necessary. The concern in such cases is on the
ground of equity rather than efficiency. Government imposes various forms of
regulations on economic agents in order to bring in equity and efficiency in
the economy. The nature and extent of regulation has changed over time, and
in recent years mainstream economic thinking has suggested de-regulation of
the economies. There is lesser control on monopoly firms and greater
emphasis on economic efficiency. However, there is still a need to regulate
the economy so that a larger share of growth goes to the marginalized sections
of society.

5.8 KEY WORDS

When rate of return is regulated in s n economy
(even if it is labour surplus) the firms adopt a
capital-intensive technology irrespective the
condition that labour is available.

Averch Johnson
effect

First Fundamental
Theorem of Welfare
Economics

: The theorem states that in the absence of

externalities, perfectly competitive

equilibrium is Pareto efficient.

market

Price smoothing

It reflects measures by the government to avoid

abrupt change in market prices of certain
essential commodities. The government can
enter into the market and purchase or sell the
commodity to stabilize prices.

Regulation

It refers to a legal restriction promulgated by

the government through its administrative
agencies. It is supplemented by a threat
(punishment or fine) if the imposed restriction
is not adhered to.

Regulatory Capture

It refers to a phenomenon in which the

government regulatory body is dominated by
the interests of the industry that it regulates.

Second Fundamental
Theorem of Welfare
Economics

: The theorem states that in order to reduce

inequality there should be transfer of wealth

from one group to another.

5.9 SOME USEFUL BOOKS/REFERENCES

Averch, Harvey and Leland Johnson, 1962, 'Behaviour of the Firm under
regulatory Constraint', American Economic Review, December, vol. 52, pp.
1052-69.
Joskow, P L and R G Noll, 1981, Regulation in Theory and Practice: An
Overview, in Studies in Public Regulation, Ed. Gary Fromm, MIT Press,
Cambridge.
Spulber, D., 1988, Regulation and Markets, MIT Press.
Winston, Clifford, 1993, Economic Deregulation: Days of Reckoning for
Macroeconomists, Journul of Economic Literature, 3 1,3, 1263-1289.

5.10 ANSWERSJHINTS TO CHECK YOUR

PROGRESS EXERCISES
-

- -

Check Your Progress 1

1)

See Section 5.2 and answer.

2)

See Section 5.2 and answer.

Check Your Progress 2

1)

See Section 5.5 and answer.

2)

See Sections 5.4 and 5.5 and answer.

Government Regulation in
the Economy