List two reasons in favor of government regulation of firms and two reasons for deregulation?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

This would really depend on the type of firm that you are talking about and the kinds of regulation that you are envisioning.

In general, the main reason to regulate firms is to prevent what are called negative externalities.  Negative externalities occur when economic transactions between two "parties" inflict costs on others.  For example, when investors created and sold the complex financial instruments to one another and the market crashed, their actions ended up costing the rest of us money.  Regulation is supposed to prevent that.

The problem with regulation is that the regulators are not omniscient.  They are likely to impose regulations on firms that put huge burdens on the firms and make them unlikely to be able to compete with other firms around the world.  In this view, regulation impedes growth and is bad for an economy.

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smudgecatnap | College Teacher | (Level 1) Adjunct Educator

Posted on

In general, government regulation is desirable when the market is unlikely to provide outcomes on its own that support the overall goals of society or to avoid negative consequences that wouldn't otherwise be captured by the market system.

Standard neoclassical economic theory argues that a firm will produce as cheaply as possible and charge the price that will maximize its profits.  Producing "as cheaply as possible" might include cutting back on quality control or maintenance of equipment, as with aircraft used in commercial flights.  Without government intervention, the incentive to maintain safe products is low; government regulations can help establish minimum standards, shifting the burden of providing safe products and services to the provider and away from the consumer and society.  Arguably, it's better for the producer to incur the cost of insuring his/her product is safe while it's being produced than it is to allow an unsafe product on the market and accept the cost of injury or death of consumers.

Some markets also rely on access to information if the consumer is to make an informed opinion.  Producers may not have an incentive to make the information available (indeed, they may have an incentive to suppress information).  Government regulation can intervene to require the firm to provide relevant information to the consumer, so that he/she understands what the product can and cannot do.

brettd's profile pic

brettd | High School Teacher | (Level 2) Educator Emeritus

Posted on

Regulation in the business world has very negative connotations, in general, as it does in politics and the editorial pages.  But some regulations are both sensible and in the public's and consumers' best interest.

Deregulating the energy and utilities markets led to profiteering, and indirectly, to the rolling blackouts early in the decade and the Enron meltdown.  The resource became both expensive and unreliable.

Another reason in favor of regulation is that it can prevent the extremes in the marketplace.  It can prevent economic meltdowns in specific sectors like banking or the stock market, while still allowing for profit and business to take place.  The removal of some of those restraints with the expiration of the Glass-Steagall Act in 1999 led to the economic meltdown of 2007.

On the other hand, there are plenty of regulations that simply are too cumbersome and unnecessary.  They hinder business opportunities, incentives to invest and put a damper on profits.  That's not good for anyone, public or private.  Deregulation does not have to mean the end of all regulations, but can also simply be a regular review of those legal limitations that no longer make sense.

Deregulation is attractive to investors and can bring in both foreign dollars to the stock market, the currency and the industrial and business world in a country.  Therefore, in the middle of a national recession in the US, it makes sense that some regulations which stifle reasonable profit and trade should be removed.

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