Regulatory economics

Regulatory economics is the economics of regulation, in the sense of the application of law by government or an independent agency for various purposes, such as remedying market failure, protecting the environment, centrally-planning an economy, enriching well-connected firms, or benefiting politicians (see Regulatory capture). It is not considered to include voluntary regulation that may be accomplished in the private sphere.

Public services can encounter conflict between commercial procedures (e.g. maximizing profit), and the interests of the people using these services (see market failure), as well as the interests of those not directly involved in transactions (externalities). Most governments therefore have some form of control or regulation to manage these possible conflicts. This regulation ensures that a safe and appropriate service is delivered, while not discouraging the effective functioning and development of businesses.

For example, the sale and consumption of alcohol and prescription drugs are controlled by regulation in most countries, as are the food business, provision of personal or residential care, public transport, construction, film and TV, etc. Monopolies are often regulated, especially those that are difficult to abolish (natural monopoly). The financial sector is also highly regulated.

Regulation can have several elements:

This differs from regulation in any voluntary sphere of activity, but can be compared with it in some respects. For example, when a broker purchases a seat on the , there are explicit rules of conduct the broker must conform to as contractual and agreed-upon conditions that govern participation. The coercive regulations of the U.S. Securities and Exchange Commission, for example, are imposed without regard for any individual's consent or dissent as to that particular trade. However, in a democracy, there is still collective agreement on the constraint—the body politic as a whole agrees, through its representatives, and imposes the agreement on the subset of entities participating in the regulated activity.

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