Government Regulation of The Economy

How should gov regulatory policy reflect efficiency concerns?

Benefit cost analysis and cost effectiveness

Modified Schematic

Congress will pass a statue or regulatory act which will create a regulatory agency and/or modifying its mission. These statutes delegate a lot of discretion to the agencies delegating rule-making to the agencies.

MC

Cost associated with producing and selling one more unit of a good

Federalism

Much regulation takes place at the state level rather than the federal level. Insurance agencies and product liability are examples

OIRA

Office of Information and Regulatory Affaires

Clayton Act

Passed by Congress in 1914 to strengthen the Sherman Act and clarify the rule of reason, the act outlawed specific monopolistic behaviors such as price discrimination, tying contracts, and unlimited mergers. Clayton act was more detailed than the Sherman Act, section four indicates that private parties can sue under antitrust laws for treble damages

Case Law

Private or government lawsuit that arises when firms are possibly in violation of statutory law these cases fill in gaps caused by statutory law

Cost effectiveness

even if placing a dollar value on benefits is impossible, it can serve efficiency goals by ensuring regulations are cost effective. However, there is lots of evidence we would meet our environmental goals at lower costs

Process of rulemaking

1) Development in regulatory agency with area of economic activity 2) Once topic on agenda it must be listed as program, OMB reviews the program to make sure no agency overlaps 3) Prepare regulatory input analysis (benefits vs. costs) 4) Agency must send an analysis for review of the OMB sixty das before the agency issues a notice of proposed rulemaking in federal registrar -There is a secret debate that occurs between OMB and agency excluding congress for agency to admit error Once approved by OMB agency can public Notice of Proposed Rulemaking -Agency puts regulation in final form -Regulation is officially approved and published as final rules in registrar -No need for congressional approval for a regulatory agency provided it can take judicial review -Different administrations brought different regulatory changes: Nixon, Carter,

Other possible welfare costs of monopoly:

1) rent seeking: eg hiring lobbyists: a monopoly may be dissipated by rent seeking 2) X inefficiency, monopolies don't minimize costs and add to social loss

Benefits of national regulators

1. Informational advantage, nation has more information 2.It's more efficient 3. Many problems can occur locally but we have national implications 4. Certain policy outcomes important for all citizens should be guaranteed

Advantages to federalism

1. Local conditions could affect both benefits and costs of regulation 2. Citizens wishing different allocation of goods can choose to relocate 3. It can reflect heterogeneity of costs and benefits in a local community

Antitrust goals

1. Maintain competition 2. Ensure fair conduct 3. Encourage economic efficiency 4. Limit big business

What are some institutional inputs as rules are written?

1. Press public notification and modifications 2. Congressional committees (hearings--legislative branch) 3. Whitehouse/office of management and budget 4. Agency regulations are subject to a judicial review so even if you think it's a good idea congress passes the bill but has a committee

Federal Trade Commission Act

A government agency established in 1914 to prevent unfair business practices and help maintain a competitive economy, support antitrust suits. Section one sets up the Federal Trade commission as an independent agency, section five says that unfair methods of competition affecting commerce is illegal. And it gives the commission power to prevent people or firms to regulate commerce.

Statutory law

A law passed by legislature that is vague, it gives broad recommendations about what is legal or illegal

Capture View/George Stigler

A situation in which a regulatory agency, although intended to act for the public/community, ends up serving business or private interests. It therefore is a failure of state since in produces incentives to promote the production of externalities negative for households.

DWL

A social loss measured by the difference between monopoly and the competitive outputs and prices

Dodd Frank Act

Act signed by president Obama in 2010 to promote the financial stability of the US for improving accountability and transparency in the financial system, to end too big to fail, and to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices and for other purposes

Benefit cost analysis

Analysis in terms of regulation that shows the pros and cons, no regulation can be perfect, but what generates the most amount of benefit and/or the least cost. Example: Regulating abatement in the air (see graph) we have to measure the MC and the MB of abatement, where the level of abatement in the air is optimal is where MB and MC intersect.

EPA

Environmental Protection Agency, established under the Clean Air Act

Sherman Act

First federal action against monopolies, it was signed into law by Harrison. Section 1 says that any contract of conspiracy in restraint of trade or commerce is illegal, which basically prohibits cartels. Section two says that monopolizing or attempting to monopolize is illegal. So it is anti-monopolization. Section four is the enforcement by department of justice by lawsuits in federal district court.

ICC

Interstate Commerce Commission, a federal regulatory agency that governed over the rules and regulations of the railroading industry. Example of a just and reassuring act.

Divide interest

Regulation arises to serve politically powerful private interest

Public Interest Theory

Regulation is imposed to solve problems of the free market (ex monopoly regulated price)

MR

Revenue gained by producing and selling on more unit

Monopoly

Single seller, one firm makes up the entire market demand. While its goal is to maximize profit, it focuses on marginal decisions. They produce at the level at which MR=MC

Politics with Cost effectiveness

Sometimes politicians favor non cost effective regulation e.g. scrubbers for coal fired power plans acid rain

Chevron Defense

Supreme Court ruled Chevron USA v. Natural Resources defense council in 1984. Agencies have the flexibility to interpret their legislative mandate in a flexible manner.

Clean Air Act

The Clean Air Act is a United States federal law designed to control air pollution on a national level. It requires the Environmental Protection Agency (EPA) to develop and enforce regulations to protect the public from airborne contaminants known to be hazardous to human health.

One Rule the OMB reviewed

The Department of Justice proposed amendments to the regulations of the Bureau of Alcohol, Tobacco, Firearms, and explosives in regards to firearms that are lost or stolen in transit. The rule "Commerce in Firearms and ammunition-Reporting theft or loss of firearms in transit" was proposed in Spring 2011 and it specified that when a firearm gets stolen in transit, it be reported as stolen or lost from the transferor's/sender's inventory. It was published in the agenda (stage 2) in spring 2011. After approved by the OMB and put in the Notice of Proposed Rulemaking, the Bureau put the rule in the final form in Fall 2014. During that year, it underwent six meetings before the final action was approved and put in the registrar January of 2016.

Some Reasons why real regulation must depart from ideal regulation:

Voter ignorance or non participation because they don't know enough about the policies and special interest influences unconcentrated benefits and diffuse costs. Special interests may dominate

Applying benefits and cost analysis empirically

You need to estimate dollar values of lives saved/benefits generated