ECONOMICS OF REGULATION

SESSION 2
 WHAT ARE ECONOMIC REGULATIONS

• WHY REGULATES?
– REGULATED SECTORS, LEGAL RATIONALE,
ECONOMIC RATIONALES OF REGULATION
• WHEN REGULATES?
– EXTERNALITIES
– MARKET FAILURE (COMPETITIVE MARKET DOES
NOT WORK)
Consideration in regulatory making
• Objective
– Welfare
– Distribution
• Policy options
– Cost Benefit analysis of each the policy options
 WHAT IS MARKET FAILURE?
• Market failure describes any situation where
the individual incentives for rational behavior
do not lead to rational outcomes for the
group.
 REGULATED SECTORS
• COMPETITIVE MARKET MODEL DOES NOT WORK
– PUBLIC SECTORS
– PUBLIC GOODS (UTILITIES: WATER ETC)
– ALLOCATION OF RESOUCES DETERMINED BY POLITICAL
DECISIONS
• CERTAIN STANDARDS NEED TO BE IMPOSED
– FINANCIAL REGULATIONS
– LABOUR MARKET REGULATIONS
– SNI FOR CONSUMER PROTECTIONS
– COMPETITION REGULATION TO PREVENT UNFAIR
COMPETITION
 LEGAL RATIONALES
• REQUIRED BY CONSTITUTIONS OR LAWS
 LEGAL RATIONALES
• REQUIRED BY CONSTITUTIONS OR LAWS
 LEGAL RATIONALES
• REQUIRED BY CONSTITUTIONS OR LAWS
– Undang Undang Persaingan Usaha
– Undang-undang Minerba
– Undang-undang Pangan
– etc
 The Economics of Regulations
• Applying economic principles to regulations
– Objective
• Maximizing welfare
• More equal distribution of income
• Policy options
– Cost Benefit analysis of each the policy options
• Microeconomics theory will be relevant
– Pricing policy – avoiding excessive/supra normal
profitnegative profit in monopolistic sector/industry