Distinguishing between economic regulation and social regulation was one of the reasons Congress assigned the agencies to do.
Explain the main rationales for vegetable, and meat items with their nation of regulation of industries that are not inherently monopolistic origin after Congress ordered the USDA to regulate the prices charged by natural.
The FDA has been ordered by Congress to come up with alternative theories for a regulation requiring restaurant chains to explain the behavior of regulators.
The FDA argued that the laws and regulations would increase the agencies' operating costs.
The benefits and costs of government regulation will be explained in this chapter.
In a recent year, the U.S. Congress enacted a number of laws that went into effect.
Government regulators contend that they will promote economic efficiency and benefit consumers by inducing U.S. industries to operate in certain ways.
The cost to comply with these regulations is over $1 trillion.
Early in the nation's history, the U.S. government began regulating social and economic activity.
Since 1970, the amount of government regulation has grown considerably.
In 2005 dollars, regulatory spending by federal agencies has generally trended upward since 1970 and has risen considerably since 2000.
New national security regulations following the 2001 terrorist attacks in New York City and Washington, D.C. have fueled a significant portion of this growth.
The increase in spending is related to an increase in regulatory enforcement by the federal government.
According to this measure, the scope of new federal regulations has generally increased since the 1980s.
There are two types of government regulation.
In the 1970s, federal government regulatory spending rose sharply, but then fell in the 1980s and now spends more than $50 billion a year.
State and local spending is not shown.
Natural monopolies that experience lower long-run average costs as their output increases are regulated by market structure, resource allocation, and governance.
Financial services industries and interstate transportation industries are examples of nonmonopolistic industries that are subject to government regulation.
Federal and state governments impose various occupational, health, and safety rules on most businesses.
The aim of most economic regulation in the United States was to control prices in industries considered to be natural monopolies.
Federal and state governments have sought to influence the characteristics of products or processes of firms in a variety of industries.
Natural monopolies have tended to have restrictions on their prices.
The rates of electrical utility companies and some telephone operating companies are regulated by various public utility commissions.
The prices charged by firms in many other industries that don't have the same long-run average costs have also been subjected to regulations.
In the United States, every state has a government agency that regulates the prices that insurance companies charge.
Government regulations establish rules for production, product features, and entry and exit within a number of nonmonopolistic industries.
The securities, banking, transportation, and communications industries are regulated by the federal government.
Securities markets are regulated by the Securities and Exchange Commission.
Commercial banks and savings banks are regulated by the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation.
Credit unions are supervised by the National Credit Union Administration.
The Federal Motor Carrier Safety Administration regulates the trucking industry.
The Federal Communications Commission has oversight powers.
Economic regulation only applies to certain industries, whereas social regulation applies to all firms in the economy.
The aim of social regulation is a better quality of life through improved products, a less polluted environment, and better working conditions.
Product safety, advertising, and environmental effects have been regulated by the government since the 1970s.
Major federal agencies are listed in Table 27-1 on the facing page.
Air pollution and the water supply in some cities are known to be hazardous.
Society might benefit from cleaning up pollutants.
Broad social regulations also involve costs that we all pay, and not just as taxpayers who fund the regulatory activities of agencies such as those listed in Table 27-1.
Responsible for preventing FTC businesses from engaging in misleading advertising, unfair trade practices, and monopolistic actions.
Investigates complaints of discrimination based on race, religion, gender, or age in hiring, promotion, firing, wages, testing, and all other conditions of employment.
The EPA has ronmental standards for air, water, waste, and noise.
The answers can be found on page 617.
The occupational, health, and safety rules that are used in all industries are considered monopolies because they cover services provided by electric, gas, and other utilities.
The so-called monopoly problem was supposed to be solved by government regulation of business.
Appropriate regulations for natural monopolies were of particular concern.
When a single firm can produce all of an industry's output at a lower per-unit cost than other firms, there is a natural monopoly.
Economies of large-scale production exist in a natural monopoly, leading to a single-firm industry.
An unregulated natural monopolist will produce to the point at which marginal revenue equals marginal cost.
This price is above marginal cost, so it leads to a socially inefficient allocation of resources by limiting production to a rate below that at which price equals marginal cost.
This is in a panel.
If the monopolist had to engage in marginal cost pricing, it would result in a loss for the firm equal to the shaded rectangular area in panel.
The profitmaximizing monopolist would go out of business.
Regulators can't force a natural monopolist to engage in marginal cost pricing.
Regulation of natural monopolies often allows the firm to set price at the point at which the long-run average cost curve intersects the demand curve.
The average cost of providing products to consumers is reflected in regulation.
The electricity, natural gas, and telecommunications industries have been making money.
All three industries use large networks of wires to transmit their products to consumers.
As the output rates of firms in these industries increased, the average costs of providing electricity, natural gas, and telecommunications declined.
The industries were treated as natural monopolies by the governments and were subject to forms of cost-of-service and rate-of-return regulation.
Electricity is provided to homes, office buildings, and factories in Houston by 15 different companies.
Electricity is sold in New York City by eight different firms.
Producers of natural gas and electricity had exclusive ownership of the wire networks that provided energy for homes, office buildings, and factories.
Various regulators have separated the production of electricity and natural gas from the distribution of these items to consumers.
Multiple producers in the U.S. now pay to use wire and pipeline networks to get their products to buyers.
Regulatory commissions impose cost-of-service or rate-of-return regulations on the network owners, and economies of scale still exist in these distribution networks.
The markets for the products that consumers actually use in their homes and businesses are open to individual producers of electricity and natural gas.
The market clearing rates that consumers pay to consume electricity and natural gas reflect both the costs of producing these items and the transportation costs that producers pay to deliver them via regulated distribution networks.
Regulators began to apply the same principles to telecommunications services as the production and sale of electricity and natural gas became more competitive.
In the 1980s, the FCC required AT&T to open its phone networks to competitors.
Federal, state, and local regulators applied the same principles to local telecommunications services.
Many U.S. cities and towns are served by two or more competing producers of wired phone services.
The cost structure of the telecommunica tions industry was changed by other forces.
The costs of providing wireless telecommunications were greatly reduced during the 1990s.
Most people and businesses thought that cellphone services were not as good as wire-based telecommunications.
The use of cellphones slowed the growth of demand for traditional wire networks.
Most cable television companies now offer Web-based access.
Anyone with access to the Internet can purchase Web phone services from many other companies.
The unraveling of conditions that created this particular market structure has led to a decrease in the scope of the government's role as regulator of natural monopolies.
Government agencies apply traditional cost-of-service or rate-of-return regulations in many U.S. electricity and natural gas markets.
The government's main role in regional markets is to enforce property rights and rules governing the regulated networks that serve competing electricity and natural gas producers.
As more and more households and businesses substitute cellular and Web-based phone services for wired phone services, the rationale for a governmental regu lator role is rapidly dissipating.
Consumers have stopped using land phone lines.
Each year, phone signals stop flowing on 3 percent of existing lines.
Telecommunications has become a free-for-all.
The industry is not a natural monopoly.
The answers can be found on page 617.
The concept of natural monopoly is less relevant because of a natural monopolist.
In the price equal to long-run marginal cost will sustain long electricity, natural gas, and telecommunications indus run losses and shut down, regulators typically allow tries, production increasingly is accomplished by natural monopolists to charge prices that just cover ous competing firms Normally, regulators have done that.
One of the main purposes of governments is to protect the interests of their citizens.
The main rationale for governmental regulatory functions is protecting consumer interests.
The idea is that the buyer alone is responsible for assessing a producer and the quality of the items it sells before agreeing to purchase the firm's product.
Various federal agencies require companies to meet minimal standards in their dealings with consumers.
A few years ago, the U.S. Federal Trade Commission assessed monetary penalties on toys " R " Us and kbb toys because they failed to ship their goods in time for christmas A few decades ago, such a government action wouldn't have happened.
The rules of the game for firms and consumers are dictated by federal agencies.
Almost every aspect of the delivery of services by airline companies is overseen by the FAA.
The FAA regulates the process by which tickets for flights are sold and distributed, oversees all to view a flight operations, and even establishes rules for returning full list of regulations put into place by the luggage after flights are concluded.
Heavy government involvement in overseeing and supervising nonmonopolistic industries has two rationales advanced.
Governments may regulate industries that create negative externalities if pollution is present.
This term refers to situations in which a producer has information about a product that the consumer does not.
It is possible for administrators of your college or university to know that another school in your vicinity offers better quality degree programs.
It wouldn't be in your college or university's interest to give out this information to people who are interested in pursuing degrees in those fields.
Consumers trying to assess product quality in advance of purchase can be affected by asymmetric information problems.
Individuals contemplating buying a company's stock, a municipal bond, or a bank's certificate of deposit in an unregulated financial market might find it difficult to assess the associated risks of financial loss.
If the air transportation industry is not regulated, a person might have trouble determining if one airline's planes are less safe than those of other airlines.
In an unregulated market for pharmaceuticals, parents might be concerned about whether one company's childhood-asthma medication could have more dangerous side effects than other firms.
Most of the available products are of low quality in extreme cases.
The market for used automobiles is an example.
Some owners know that their cars have been well maintained.
Others have not kept their autos in good repair and are aware that they will be susceptible to more than normal mechanical or electrical problems.
Half of the used cars for sale in your local used-car market are high-quality autos.
Half of the cars are known as "lemons," which are likely to break down within a few months or even weeks.
If a consumer is willing to pay $20,000 for a particular car model if it is in excellent condition, but not if it is a lemon, then they will only pay $10,000 for it.
People who own lemons are willing to sell their lemons at any price, but people who own high-quality used cars are only willing to sell at a price of at least $20,000.
In this example, only lemons will be traded, at a price of $10,000, because owners of cars in excellent condition will not sell their cars at a price that prospective buyers are willing to pay.
This problem is not limited to the used-car industry.
Any product that is difficult for consumers to fully assess is susceptible quality in an industry.
Firms that sell high-quality products can address the lemons problem.
Product guarantees and warranties can be offered by them.
To help consumers separate highquality producers from incompetent or unscrupulous competitors, the high-quality producers may work together to establish industry standards.
External product certification may be sought by firms in an industry.
They can ask for scientific reports to support proposed industry standards and witness that products of certain firms meet those standards.
Firms can hire outside companies or groups to issue product-certification reports.
Private market solutions such as warranties, industry standards, and product certification are insufficient because governments have concluded that asymmetric information and lemons problems are rationales for regulation.
To address asymmetric information problems, governments may offer legal remedies to consumers or enforce licensing requirements.
In some cases, governments go far beyond simple licensing requirements by establishing a regulatory apparatus for overseeing all aspects of an industry's operations.
The Federal Trade Commission can impose penalties for product failures, which can provide consumers with protections similar to guarantees regulations intended to protect consumers.
Congress passed a mail-order statute in the early 1970s that allowed the FTC to charge toy companies for failing to meet pre- Christmas delivery dates.
The mail-order law made the toy companies' delivery guarantees legally binding.
The FTC applied the law in this case, but any consumer could have filed a lawsuit under the terms of the statute.
Federal and state governments are involved in consumer protection by issuing licenses to firms that are legal to produce and sell certain products.
The governments of nearly half of the states give the right to sell caskets only to people who have a mortuary or funeral director's license.
Licensing requirements can limit the number of providers and limit the sale of low-quality goods.
In Chapter 24, you learned that these requirements can make it easier for established firms to act as monopolists.
If governments rely on the expertise of established firms for assistance in drafting licensing requirements, these firms have strong incentives to recommend low standards for themselves but high standards for prospective entrants.
Liability laws and licensing requirements can be insufficient to protect the interests of consumers.
A government may decide that lemons problems in banking are so bad that consumers will lose confidence in banks, and bank runs may occur.
Similar rationales may be used to establish economic regulation of other financial services industries.
It may apply consumer protection rationales to justify the economic regulation of additional industries.
The government can make sure that con sumers are protected from incompetent producers of foods and pharmaceuticals.
The government may decide that a host of other products meet consumer protection standards.
It is possible that the people who produce the products also have to ensure workplace safety.
The United States and most other developed nations have seen widespread social regulation emerge in this way.
The answers can be found on page 617.
When problems are most severe, the market for quality products should be the priority.
A common justification for government regulation is to protect consumers from adverse effects of requirements.
Firms have to abide by government regulations.
Businesses engage in a number of activities intended to avoid the true intent of regulations or to bring about changes in the regulations that government agencies establish.
Sometimes individuals and firms respond to a regulation in a way that is in line with the law, but undermines its spirit.
After a regulation is put into effect, individuals may violate the law but still comply with the letter of the law.
The law's effects are lessened if a regulation requires spirit.
The feedback effect makes parents less concerned about how many sweets their children eat.
The food industry's oil was exposed during the mid-2000s.
When hydrogen is added to veg, it creates fat with no trans fats.
The FDA decided to require companies to reveal the human body because of trans fats.
Many people should be encouraged to use a lot of trans fats in their food products.
More companies were encouraged to eliminate trans fats.
The people who enforce government regulations operate outside the market and their decisions are determined by nonmarket processes.
There are a number of theories about regulators.
Regulation can harm consumers by generating higher prices and fewer product choices, while benefiting producers by reducing competitive forces and allowing higher profits.
A theory of regulatory behavior predicts that regulators will eventually be captured by the industry they regulate.
The people who know the most about the special interests of the industry are the people who are already in the industry.
There are people who have been regulated.
According to the capture hypothesis, individual consumers of a regulated industry's products and individual taxpayers who finance a regulatory agency have interests too diverse to be very concerned with the industry's actions.
Special interests of the industry are well defined and organized.
Future employment with one of the regulated firms is possible because of these interests.
Regulators have an incentive to support the position of a well-organized special-interest group.
The FDA was given the authority to regulate the tobacco industry because it would have to stop the distribution of counterfeit tobacco products.
The legislation allows the FDA to require reductions of tar arettes.
FDA regulation of the tobacco industry promises to control nicotine, ban the use of certain flavors and ingredients, and restrict the FDA to act in the interests of current tobacco firms.
Tobacco firms have been identified as the ones that need changes in the proposed laws.
Some of the industry's key interests are pursued by the FDA.
There is a theory of regulatory behavior that has a different view of regulators' behavior.
The aims of regulators are the focus of this theory.
The main objective of a regulator is to keep his or her job, according to the proposal.
The regulatory agency must be approved by the legislators who originally established it, as well as consumers of the agency and the regulated industry.
The regulated industry's products must be taken into account by the regulator.
The share-the-gains, share-the-pains theory suggests that regulators should worry about legislators and consumers as well.
Regulators might lose their jobs if industry customers complain about improper regulation.
The capture theory predicts that regulators will allow electric utilities to raise their rates in the face of higher fuel costs, but the share-the-gains, share-the-pains theory predicts a slower, more measured regulatory response.
Regulators will allow an increase in utility rates, but they will not be as quick or complete as predicted by the capture hypothesis.
The agency isn't completely captured by the industry.
The views of consumers and legislators have to be considered.
It is difficult to put a dollar value on safer products, a cleaner environment, and better working conditions.
Over time, the benefits of most regulations accrue to society.
It is difficult to measure the costs of regulation.
About 5,000 new federal and state regulations are issued each year.
Taxpayers in the U.S. pay more than $50 billion per year to staff regulatory agencies with more than 250,000 employees.
Businesses have to devote resources complying with regulations, develop creative responses to regulations, and fund special-interest lobbying efforts.
It can be difficult for companies to comply with one regulation without violating another, and they have to figure out how to avoid legal tangles.
According to the Office of Management and Budget, annual expenditures for businesses in the US amount to more than $700 billion a year.
This estimate does not include the costs of satisfying regulatory demands.
It ignores the costs of opportunity.
The owners, managers, and employees of companies could be doing other things with their time and resources.
According to economists, the opportunity costs of complying with federal regulations may be as high as $300 billion per year.
Higher prices are passed on to consumers.
Government regulacy in the United States probably exceeds $1 trillion per year.
This figure imposes costs on regu only for federal regulations.
The cost of regulation in the United States is more than $1.75 trillion a year.
The answers can be found on page 617.
Direct affected are the costs of regulation.
The aim of the U.S. government is to encourage competition.
Congress has tried to legislate against business practices that it believes to be anticompetitive.
This is the main idea behind antitrust legislation.
There will be no restriction of output and no monopoly prices if the courts can prevent colluding among sellers of a product.
The prices of goods and services will be close to their marginal social costs.
There are four antitrust laws summarized in Table 27-2 on the facing page.
The Sherman Act is the most important of these.
The Sherman Antitrust Act was the first attempt by the federal government to control the growth of monopoly in the United States.
This act is vague.
The act was used to prosecute the Standard Oil Trust of New Jersey.
Any contract, combination, or conspiracy to restrain trade or commerce within the United States or across U.S. is subject to the Sherman Antitrust Act of 1890.
Any person who attempts to monopolise trade or commerce will be held criminally liable.
The act of 1914 prohibits certain business practices.
When price differences are not due to actual differences in selling or transportation costs, then discrimination in prices is banned.
A company cannot sell goods if the purchaser must only deal with that company.
Corporations can't hold stock in other companies if this will decrease competition.
cutthroat pricing intended to drive rivals from the marketplace is one of the business practices that reduce the extent of the 1914 petition.
The Federal Trade Commission was established to make sure that unfair methods of competition in commerce are not allowed.
Deceptive business practices were added to the list of illegal acts.
Chain stores are accused of driving smaller competitors out of the marketplace.
If these actions substantially reduce competition, price discrimination through special concessions in the form of price or quantity discounts, free advertising, or promotional allowances granted to one buyer but not to others, is forbidden.
More than 80 percent of the nation's oil refining capacity was controlled by it.
Standard Oil of New Jersey was forced to break up by the Supreme Court because they didn't have a choice.
The Sherman Act was enacted more than a century ago.
The Sherman Act was violated by the producers of the computer chips when they colluded to fix the price of the chips.
The Sherman Act violation was paid for by the company.
The Sherman Act of 1914 was clarified by the Clayton Act, which identified certain business practices that were to be legally prohibited.
The Federal Trade Commission Act was passed in 1914.
The Federal Trade Commission was established to investigate unfair trade practices, as well as certain business practices that involved overly aggressive competition.
The FTC was given the power to regulate advertising and marketing practices by U.S. firms because of a 1938 amendment to this law.
The Robinson-Patman Act of 1936 amended the Clayton Act in order to drive smaller competitors out of business.
Labor unions, public utilities, electric, gas, and telephone companies are exempt from antitrust legislation.
When these issues actually surfaced in the 2000s, U.S. and European antitrust authorities learned that these are not just rhetorical questions.
Growing international linkages among markets for many goods and services have made antitrust policy a global undertaking.
The main goal of antitrust policies is to protect proposed mergers under antitrust laws.
This is a formal objective of the EU antitrust authorities.
Tension has been created between the U.S. and EU.
The concern of antitrust authorities in the United States is caused by the increasing dominance of a single firm.
If they determine that the increased market dominance arises from factors such as exceptional management and greater cost efficiency that ultimately benefit consumers by reducing prices, U.S. authorities typically will remain passive.
Regardless of what factors might have caused the business's preeminence in the marketplace or whether the antitrust action might have adverse implications for consumers, they must do so.
The answers can be found on page 617.
The Federal Trade tract and combination in restraint of trade was established thanks to the first national antitrust law, the 1914 Antitrust Act of 1890.
The __________ Act of 1914 made it illegal for large producers to drive out small competitors.
The largest antitrust fine in history was imposed on Intel, which makes and sells 80 percent of the chips that power desktop computers.
The second-largest producer, Advanced Micro Devices, accounts for between a legal settlement and Intel paying another $1.25 billion to it.
10 and 11 percent of the microprocessors produced worldwide will be profits of the firms.
The average price of a chip fell from 2000 to 2008 and consumers were paying more for it.