Many economists believe that free market rules do not always work absolutely effectively for all industries and for all situations, and thus, a need for government regulation might emerge in some cases. Such issues as monopolies or predatory pricing might evolve in different business areas because of high entry barriers or low availability of substitutes in these industries (Welch & Welch, 1995). The goal of the government in such situation is to stop unethical business practices and to impose regulations acting as barriers for such practices. Active regulatory processes in the US started in 1880s, and the trends towards regulation started in railroad industry in order to prevent the practices of unfair pricing, then during the Great Depression regulations for transportation, food and drug safety and communications were introduced, and in the 1970s regulations were imposed with regard to health, safety and environment factors (Neumann & Weigand, 2004). However, starting with 1980s, there has emerged a trend towards deregulation.
Government regulations are commonly imposed in three major cases: when there is imperfect information sharing in the industry, for cases of natural monopolies and for externalities (Tucker, 2010). Government regulations might relate to control of prices, control over the volumes of import and export, limitations and compliance standards associated with environmental and social consequences of business activities, etc. These regulations create a number of benefits for the consumers and for the society as a whole. Consumers might not have enough information to choose optimal products and services, and regulations help them to make best choices (Ghertman & Menard, 2009). For example, food and drug regulations indicate which products are effective and safe, while consumers might not be able to get access to this information on their own. Regulations protect the consumers against monopolistic pricing and encourage the selection of reasonable prices (Ghertman & Menard, 2009).
Environmental regulations secure the environment for sustainable future and ensure that our descendants would be able to live in at least satisfactory environment.
The costs of regulation can also be significant: costs of compliance lead to price increase, and quality requirements also affect the prices of goods and services, thus affecting impoverished social groups, which might not be able to afford high-quality products and services. Price regulation might cause the need for additional funding and tax exemptions, which reduce the budgets and increase the taxpayers’ burden. Economists commonly state that regulations should only be imposed in the spheres where the benefits are greater than costs.
The research by Office Management and Budget (OMB) agency shows that in some industries the costs and benefits are comparable, and there also are many industries where benefits significantly outweigh the costs. According to recent research data, estimated annual benefits for Federal regulations during the 2000-2010 period range from $132 to $655 billion, and costs of these regulations range accordingly from $44 to $62 billion (2011 Report to Congress on the Benefits and Costs of Federal Regulations, 2011). Most rules have net benefits, although the process of estimating benefits and costs of the regulations is quite complex. For certain areas, the benefits can hardly be monetized, and thus only costs are considered.
Despite the evident benefits of regulation, there are situations when deregulation is favorable. The state of the economy and the relationships with foreign countries as well as international division of labor gradually change the dynamics of many industries (e.g. IT, information, telecommunication, etc.) (Carbaugh, 2010). The industries which were previously regulated, might need deregulation because of changing market conditions. The advantages of deregulation include the absence of compliance costs and the use of free market rules for the industry instead of regulations. The industry will be able to respond better to market demands, and increased competition might create further benefits for the consumers such as equilibrium price and greater diversity of products and services (Carbaugh, 2010).
Overall, changes of business environment in the regulated spheres such as technology changes, decrease of entry barriers, market globalization and other trends might change the competition within these industries and eliminate the need for government regulation, or lead to the situation, when the costs of regulation exceed the benefits. In these cases, the government should opt for deregulating such industries. Similarly, if the conditions for unfair business practices are created due to economical changes in certain industries, government should impose appropriate regulations in these industries if estimated benefits of regulation outweigh the costs of compliance (Boyes & Melvin, 2006). In the industries where externalities are involved, regulation is necessary because some effects of the externalities are difficult to monetize. It is possible to conclude that government regulation is a necessary measure in many industries, and the key to applying the regulations is the positive balance of benefits and costs.
2011 Report to Congress on the Benefits and Costs of Federal Regulations. (2011). Available from http://www.whitehouse.gov/sites/default/files/omb/inforeg/2011_cb/2011_cba_report.pdf
Boyes, W. & Melvin, M. (2006). Economics. Cengage Learning.
Carbaugh, R.J. (2010). Contemporary Economics: An Applications Approach. M.E. Sharpe.
Ghertman, M. & Menard, C. (2009). Regulation, deregulation, reregulation: institutional perspectives. Edward Elgar Publishing.
Neumann, M. & Weigand, J. (2004). The international handbook of competition. Edward Elgar Publishing.
Tucker, I.B. (2010). Economics for Today. Cengage Learning.
Welch, P.J. & Welch, G.F. (1995). Economics, theory & practice. Dryden Press.