bg 10 471.23 fall 2013. regulation law, economics, & politics baron ch 10

BG

10

471.23

Fall 2013

Regulation

Law, Economics, & Politics

Baron ch 10

Times of change

late 1800s Populist era

1930s Progressive era the New Deal

1960s… social regulation

1970s… econ deregulation

2010s… ?

Main Fed Bodies

1913 Federal Reserve System

1914 Federal Trade Commission

1916 International Trade Commission

1930 Federal Energy Regulatory Commission

1931 Food & Drug Commission

1934 Securities & Exchange CommissionFederal Communications Commission

1935 National Labor Relations Board

Main Fed Bodies

1948 Federal Aviation Administration

1961 Federal Maritime Commission

1965 Equal Employment Opportunity Commission

1970 Environmental Protection AgencyNational Highway Traffic Safety Administration

1972 Consumer Product Safety Commission

1973 Occupational Safety & Health Administration

1975 Nuclear Regulator Commission

Types of Interventions

Controlling prices

Setting floor prices

Providing for solvency

Controlling # of market participants


Establishing service territories

Providing product information

Rationing common pool resources

Allocating public resources

Controlling “unfair” international trade


Mandating product characteristics & tech

Establishing performance standards

Requiring premarketing approval

Ensuring product safety

Controlling toxic emissions & other pollutants


Ensuring equal opportunity

Regularizing employment practices

Specifying qualifications

StructureWhy regulation?

A. “theory” of market imperfections1. natural monopoly2. externalities

pecuniary vs. nonpecuniary approaches

3. moral hazard4. public goods5. asymmetric information6. government imperfections

B. capture “theory”C. rent-seeking “theory”D. political “theory”

What do regulators do?1. Command & Control2. Incentives3. Persuasion

Why regulation?

regulation has always existed

If a merchant give an agent corn, wool, oil, or any other goods to transport, the agent shall give a receipt for the amount, and compensate the merchant therefor. Then he shall obtain a receipt from the merchant for the money that he gives the merchant.

Code of Hammurabi (para. 104) ca. 1750 BC

Why regulation?

in the US utilitarian rationales dominate

A. “theory” of market imperfections

B. capture “theory”

C. rent-seeking “theory”

D. political “theory”

Language for public consumption & for regulatory consumption differs.

Why regulation?

A. theory of market imperfections saving capitalism from itself

We have always known that heedless self-interest was bad morals; we now know that it is bad economics.

FD Roosevelt

Why regulation?

A. theory of market imperfections wealth not maximized inefficient allocation of

• resources

• money

• labour

not:market does “bad” things

Why regulation?

A. kinds of market imperfections1. natural monopoly

2. externalities

3. moral hazard

4. public goods

5. asymmetric information

6. government imperfections

1. Natural Monopoly

likely if economies of scale

almost certain if 1 economic agent can

produce more cheaply than 2

controversial necessarily bad? inevitable? durable?

Why regulation?


• pecuniary vs. nonpecuniary• approaches



2. Externalities

actions affecting others not engaged in decision transaction

• 1 pollution

• multiple rent property for noxious use

2. Externalities

can be either harmful

• I store a junk car in my front yard

beneficial• I put art in my front yard

http://www.flickr.com/photos/grapejuicegirl/190714506/

2. Externalities

pecuniary affect through changes

in prices• of goods & services

nonpecuniary affects

• preferences

• production opportunities

of economic agent(s)

• city folk buy all the houses in my quaint little town as weekend retreats

• intervention? if negative

» then maybe

• hog producer sets up barn right beside my bed and breakfast in that quaint little town

• intervention? if negative

» then usually

2. Externalities

responses• enviro-levy

• command-and-control regulation

• incentive approaches

attempt being made to change from nonpecuniary to pecuniary change from externality to internality

2. Externalities

The Tragedy of the Commons» http://www.sciencemag.org/sciext/sotp/commons.dtl

For that which is common to the greatest number has the least care bestowed upon it

AristotlePolitics 2:3

2. Externalities

The Tragedy of the Commons

For that which is common to the greatest number has the least care bestowed upon it

AristotlePolitics 2:3

Why regulation?





3. Moral Hazard

similar to an externality

people don’t bear full cost of actions seat belts building on a flood plain a bank making risky investments

Why regulation?





4. Public Goods

“consumption” by 1 doesn’t prevent consumption by another

• national defense

• radio broadcasts

• street lights

Who will pay? Who will do it?

5. Asymmetric Information

another buyer knows more than you

so they can buy for less

• seller doesn’t get maximum price

seller knows more than buyer

buyer gets less value• alternative purchase

prevented

• insider trading

• seniors & home repair

• car repair

• house sales

• drugs

5. Asymmetric Information

especially a problem if info is costly

usual solution forced disclosure

6. Government “imperfections”

…government is not the solution to our problem; government is the problem.

Ronald Reagan1st Inaugural Address1981

Why regulation?





Why regulation?

B. capture theory measures initially taken

• because of market imperfections

over time• measures evolve to benefit regulated entities

broadcast regulations

Why regulation?

B. capture theory

C. rent-seeking theory regulations established to benefit politically

effective interests• railroads

Why regulation?

B. capture theory

C. rent-seeking theory

D. political theory all interest groups seek regulation to serve

their interests• laws governing unions

Why regulation?

A. theory of market imperfections

B. capture theory

C. rent-seeking theory

D. political theory

In US, utilitarian arguments are the least controversial.

Influences on Regulators

What do regulators do?

1. Command & Control

2. Incentives

3. Persuasion

1. Command & Control

Regulators order engineering controls

• scrubbers for coal-fired electric power plants

or require the best available tech• for pollution abatement

2. Incentives

Take into account benefits costs

of attaining environmental objectives

Align social costs private costs

of pollution and its abatement

2. Incentives

tradable permits system aka cap-and-trade systems

max total allowable set issue permits (entitlements)

• for that amount

allow permits to be traded gradually reduce total

3. Persuasion

shaming shaping

• information

Finance Minister Jim Flaherty suggested Monday some banks will make changes to how they charge fees for their automated banking machines.

CBC

Business & the Environment

EPA

Enviro Politics

NIMBY

Voluntary Programs

Social Efficiency Coase Theorum

EPA

Environmental Protection Agency “independent” agency in executive branch

budget $7.8 billion in 2005 18,000 employees

administrator appointed by President confirmed by Senate

EPA Responsible for admin major enviro acts

47 Insecticide, Fungicide & Rodenticide (72, 88)

63 Clean Air (70, 77, 90)

65 Solid Waste Disposal

67 Air

69 Enviro Policy

70 Water (72, 74, 77, 87)

72 Enviro Pesticide Control

73 Endangered Species

74 Safe Drinking Water

76 Toxic Sub Control (88)

76 Resource Conservation & Recovery

80 Superfund Comprehensive Environmental Response, Compensation & Liability

86 Emergency planning & Right-to-Know

90 Ocean Pollution

90 Pollution Prevention

90 Oil Pollution

92 Reclamation Projects

96 Food Quality Protection

e.g.: Superfund

cleanup existing toxic waste disposal sites• ~ 20,000

• ~ $600 b

attempts to • identify source of dumping

• force it to clean site

criticism: “retrospective liability”

EPA “Activism”

Internet send info to citizens & local groups

focus on possible health risks children more than enviro effects

use other laws

Enviro Politics

complex scientific uncertainty

• causes

• consequences

incomplete info• costs

• benefits

long timelines

Enviro Politics

motivated by distributive consequences normative perspectives about

• protection of environment

• health

Enviro Politics

contentious jurisdiction

• fed/state

• between countries

reason for action• utilitarian vs. values-based

time• “But what about the children!?”

Enviro Politics

contentious disagreements

• alternative approaches liability vs. regulation

• value of protection

significant economic consequences• profits

• jobs

• trade

NIMBY

“Not In My Backyard”

local environmental concerns possible risks to persons or property

focus often refuse disposal sites toxic waste sites chemical and oil plants

NIMBY

TRI• Toxics Release Inventory

• Federal

22,000 plants 300 chemicals

amendment to Superfund reauthorization 1985

Voluntary Programs

ISO 14001 a worldwide environmental program improve enviro management systems 36,000 companies 1,500 in US

“responsible care” chemical industry

Social Efficiency

less safe more safe

$

injurycosts

safety costs

total costs

Coase Theorem

A BNet

Social Value

production

emissions

profitharm

0 0 0 0 0

100 10 40 -20 40-20= 20

200 20 70 -60 70-60= 10

1991 Nobel Prize in Economics

Coase Theorem

“Social efficiency can be achieved regardless of which party is assigned the entitlements.”

However distributive consequences differ

Coase Theorem

negotiations to max social value desired only occur if

• entitlements clearly assigned protected

“internalize the externality” “social efficiency”

A Bnet

social value

production

emissions

profit

harm

without abatem

ent

0 0 0 0 0

100 10 40 -20 20 with abatement

200 20 70 -60 10

reduce

cost to abate net social value

if A abates

if B abates

if A abates if B abates

50% -15 -2070-20-15=

35

70-20-20=

30

100% -30 -4070-0-30=

40

70-0-40=

30

Coase Theorem: Abatement

Social Efficiency

less safe more safe

$

injurycosts

safety costs

total costs

Social Efficiency in Pollution Abatement

emissions abated

$

cost of harm

cost of abatement

total cost of abatement &

harm

socially efficient abatement


generally right wing

• prefers permits

left• prefers taxes


permit advantages know amount beforehand price of permits built into product create a market in permits

• external actors can buy permits

incentive to innovate• equal or greater

no temptation to tax

all this sounds very nice & logical

however, permit politics is contentious “right” to issue permits

• whether to permit at all

amount to permit• if changes?

how distributed• allocated?

• auctioned?


The Tragedy of the Commons

bg 10 471.23 fall 2013. regulation law, economics, & politics baron ch 10

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