Chapter 8: Government Regulation of Business

Administrative Procedure Act

(APA), agency actions is guided generally by this act, which provides a framework for agency rule-making and detail broad standards for judicial review of agency decisions.

Identify the powers of congress over agencies

1) Creating the agencies 2) Discouraging agency actions 3) Controlling agency budgets 4) Dissolving the agencies

Hybrid Rule-Making

Combines the elements of formal and informal rule-making. Its an informal rule-making with additions in the form of some trial elements (more oral testimony and hearings) that have the effect of providing a more detailed record w/o all of the procedural requirements of formal rule-making.

Commerce Clause of the U.S Constitution

Broadly specifies the power accorded to the federal government to regulate business activity. Affords Congress exclusive jurisdiction over foreign commerce.

View #3

Bureaucrats who perform government regulation are themselves a powerful force in maintaining and expanding that regulation.

Executive Agencies

Cabinet-level departments, and within them are smaller units.

Enabling Legislation

Congress created those independent agencies, and accorded them substantial authority to regulate a specified segment of America Life.

Congressional Constratints

Congress creates and can dissolve the agencies. Congress controls agency budgets and thus can encourage or discourage particular agency action.

In creating an agency

Congress delegated a portion of its authority to that body. It acknowledges the existence of a problem and recognizes that it is not the appropriate body to address the specific elements of the problem.

Agencies, in order to enforce rules, must turn to in place of the informal procedures such as settlements

Judicial Proceedings

In the context of the duty of agencies to control rates, the deregulation movement

Led to a general decline in agency rate-setting

Local Government regulation

Much less economically significant than state regulation. Intervention in business typically involves various licensure requirements.

Dodd-Frank

Primarily directed to large financial institutions, including a few very large "nonbanks" like insurances companies. Its chief goal, the law is designed to prevents the financial collapse of giant banks and businesses that are so big that some form of government bailout would be necessary.

Negative Externalities

Producers and consumers do not pay the full cost of a product, so those costs are thrust on parties external to the transaction.

Supremacy Clause

Provides that the Constitution, laws, and treaties of the United States are "the supreme Law of the Land."

Imperfect Information

Reasoned decisions require adequate information and often will not have adequate information, governments sometimes impose regulations either to improve the available information or to diminish the unfavorable effect of inadequate information.

Police power

Refers to the right of the state governments to promote the public health, safety, morals, and general welfare by regulating persons and property within each state's jurisdiction. The states have, in turn, delegated portions of the police power to local government units.

in the case of informal rule-making

the agency must permit written comments on the proposal and may hold open hearings.

Agencies enact three types of rules

1) Procedural rules delineate the agency's internal operating structure and methods. 2) Interpretive rules offer the agency's view of the meaning of those statues for which the agency has administrative responsibility 3) Legislative rules are policy expressions having the effect of law. The agency is exercising the law-making function delegated to it by the legislature.

Which of the following is true of the parties involved in administrative hearings and trials?

1) They have the right to present their cases and cross-examine witnesses. 2)They can file motions and raise objections.

Administrative Agencies

Act as mini governments, performing quasi-executive, quasi-legislative (rule making) and quasi-judicial (adjudicatory) roles broadly involving control of supply, rates, and conduct in large segments of American Life.

in the case of formal rule-making

After providing notice, the agency must hold a public hearing conducted with most of the procedural safeguards of a trial, where all interested parties may call witnesses, challenge the agency evidence, and so on.

Judicial Processes

Although informal procedures such as settlements are preferred, agencies commonly must turn to judicial proceeding to enforce agency rules.

Licensure

Designed to protect the public from unsafe, unhealthful, and substandard goods and services, but critics contend that licensure often blocks entry by competitors and that the benefits are exceed by its costs in increased prices, decreased services, and administrative overhead.

Administrative Law Judge

Failing a settlement, the parties proceed much as in a civil trial. Ordinarily the case is heard by an ALJ. Parties have the right to present their cases, hire counsel, cross examine, file motions, raise objections, and so on. They do no have the right to a jury trial. The ALJ decides all questions of law and fact and the issues a decision (order). In general, that decision is final unless appealed to the agency/commission. After exhausting opportunities for review within the agency, appeal may be taken to the federal court system.

The federal government cannot regulate intrastate commercial activities even if they have a substantial effect on interstate commerce

False

Control of Rates

Federal agencies charged with regulating utilities and carries set the prices to be charged for the services offered within their jurisfictions.

Control of Conduct

Federal agencies may compel or restrict business conduct.

Interstate Commerce

Federal authority over "commerce among the several states", affords the federal government very broad power to regulate commercial activities across the U.S and was designed to create an open, effectively borderless market throughout the nations, wherein goods would move freely among the states, unimpeded by state and local tariffs and duties.

Agency

Federal law defines it as any government unit other than the legislature and the courts.

In the event of an irreconcilable conflict between federal and state law, the Supremacy Clause of the U.S Consitution proves that

Federal law will preempt state or local aw, rendering it unconsitutional.

Identify a true statement about market rationality

Financial traders often operate with bounded rationality.

Administrative law

Governing those agencies technically addresses the entire executive branch of government.

In a free market, the government sometimes imposes regulations to

Improve the available information

Government Intervention

In a free enterprise economy would be justified only when the market is unable to serve the public interest- that is, in instances of market failure. Market Failure is attributed to certain inherent imperfections in the market itself.

IRS regulations are an example of rules enacted by agencies

Interpretative

States are primarily responsible for

Regulating the insurance industry and are heavily involved in regulating banking, securities and liquor sales. Have some form of public service commission charged with regulating utilities in the public interest. Seek to directly enhance competition via antitrust legislation. Have passed laws forbidding usury, false advertising, stock fraud and other practices harmful to the consumer.

View #2

Regulation is developed at the request of industry and is operated primarily for the benefit of industry.

View #1

Regulation is necessary for the protection and general welfare of the public. Government engaging in regulatory efforts designed to achieve a more equitable distribution of income and wealth.

Control of Supply

Some agencies control entry into certain economic activities.

Public Goods

Some goods and services cannot be provided through the pricing system because we have no method for excluding those who choose not to pay. The added cost of benefiting one person is zero or nearly so, and, in any case, no one can effectively be denied the benefits of the activity.

Asymmetric information

Some parties to a transaction simply know more than the other parties to that transaction, with the result that optimal efficiency cannot be achieved.

Joseph Tomain Life Cycle

Stage 1: The free market itself, the period when government regulation is absent from the market in question Stage 2: A market failure is identified, suggesting the need for government intervention. Stage 3: Government regulation is imposed in the form of a rule. Stage 4: Regulatory failure occurs because we believe the benefits of the rule in question no longer exceed its costs. Stage 5: The government may respond with regulatory reform to correct the failure, or it may to stage 6. Stage 6: Where the regulation in question is simply eliminated. The market, thus fully deregulated, has returned to Stage One and the regulatory life cycle is complete.

When state or local laws conflict with the federal laws, the problem is resolved by the application of the ___ of the U.S Constitution

Supremacy Clause

Rule-Making Process

The APA provides both informal and formal rule-making processes for legislative rules. Under both approaches, the process begins with the publication of Notice of Proposed Rule Making in the Federal Register.

Legislative Functions

The agencies create rules that in effect are laws. These rules provide the details necessary to carry out the intentions of the enabling legislation. In day-to-day business practice, the rules are likely to be much more important than the original congressional legislation.

Monopoly

The government plays the role of referee in creating and enforcing rules that curb anticompetitive conduct such as price-fixing and abuse of market dominance that undercut the virtues of the free market.

Executive Constraints

The president appoints the top administrators for the various agencies, thus significantly influencing the conservative or liberal slant of the agency.

Independent Agencies

The president has direct authority over the executive agencies, while this agencies are intended to operate with less fear of interference.

Executive Functions

The protection of the public by ensuing compliance with laws and regulations. Most agencies spend a great deal of time conducting inspections and investigations and collecting information. Agencies enter into contracts, lease federal lands, register securities offerings, award grands, resolve tax disputes, settle worker's compensation claims, administer government benefits to the citizenry and much more.

Identify a true statement about independent federal agencies

They have substantial authority to regulate a specified segment of American Life

Positive Externalities

Those in which a decision makers does not receive the full benefit of a decision because a portion of those benefits "spill over" on to third parties who were not direct participants in the decision. Not generally regulated.

Historically, federal agencies charged with regulating utilities and carriers the prices to be charged for the services offered within their jurisdictions

True

Bounded Rationality

We operate with limited rationality. Hence, government intervention might be appropriate.

Externalities

When all the costs and benefits of a good or service are not fully internalized or absorbed by producers or consumers, those costs or benefits fall elsewhere as what economists have labeled neighborhood effects, or spillovers.

The federal government's authority over interstate commerce

allows it to create a borderless market throughout the nation