Solved: It remains a widely held belief that regulation is in

It remains a widely held belief that regulation is in

It remains a widely held belief that regulation is in the public interest and influences firm
behavior toward socially desirable ends. However, in the early 1970s, Nobel laureate George
Stigler and his colleague Sam Peltzman at the University of Chicago introduced an alternative
capture theory of economic regulation. According to Stigler and Peltzman, the machinery and
power of the state are a potential resource to every industry. With its power to prohibit or
compel, to take or give money, the state can and does selectively help or hurt a vast number of
industries. Because of this, regulation may be actively sought by industry. They contended that
regulation is typically acquired by industry and is designed and operated primarily for industry's
benefit.
Types of state favors commonly sought by regulated industries include direct money subsidies,
control over entry by new rivals, control over substitutes and complements, and price fixing.
Domestic "air mail" subsidies, Federal Deposit Insurance Corporation (FDIC) regulation that
reduces the rate of entry into commercial banking, suppression of margarine sales by butter
producers, price fixing in motor carrier (trucking) regulation, and American Medical Association
control of medical training and licensing can be interpreted as historical examples of control by
regulated industries.
In summarizing their views on regulation, Stigler and Peltzman suggest that regulators should
be criticized for pro-industry policies no more than politicians for seeking popular support.
Current methods of enacting and carrying out regulations only make the pro-industry stance of
regulatory bodies more likely. The only way to get different results from regulation is to change
the political process of regulator selection and to provide economic rewards to regulators who
serve the public interest effectively.
Capture theory is in stark contrast to more traditional public interest theory, which sees
regulation as a government-imposed means of private-market control. Rather than viewing
regulation as a "good" to be obtained, controlled, and manipulated, public interest theory views
regulation as a method for improving economic performance by limiting the harmful effects of
market failure. Public interest theory is silent on the need to provide regulators with economic
incentives to improve regulatory performance. Unlike capture theory, a traditional view has been
that the public can trust regulators to make a good-faith effort to establish regulatory policy in
the public interest.
A. The aim of antitrust and regulatory policy is to protect competition, not to protect competitors.
Explain the difference.
B. Starting in the 1970s, growing dissatisfaction with traditional approaches to government
regulation led to a global deregulation movement that spurred competition, lowered prices, and
resulted in more efficient production. Explain how this experience is consistent with the capture
theory of regulation.
C. Discuss how regulatory efficiency could be improved by focusing on output objectives like
low prices for cable or telephone services rather than production methods or rates of return.

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