Government Intervention: Regulation & Deregulation (AQA A Level Economics)

• Regulation is the process of monitoring and enforcing the laws
• Governments create rules to limit harm from negative externalities of consumption/production and to create competitive markets
  • Regulatory agencies monitor that the rules are not broken
  • There are more than 90 regulators in the UK
  • Individuals or firms may be fined/imprisoned for breaking the rules
    
    
• Industries such as water, telecoms, energy and the financial sector are regulated
• Examples of some industry regulators include Ofgem (Energy), Ofwat (Water) and the Financial Conduct Authority (Financial markets)

The Advantages & Disadvantages of Regulation

Advantages

Disadvantages

May lower prices which increases consumer surplus Individuals or firms may be fined/imprisoned for breaking the rules providing a disincentive to break the rules E.g. Selling cigarettes to minors is a punishable offence   Fines can generate extra government revenue Can reduce the external costs of demerit goods Can lead to positive externalities The minimum school leaving age means young people have to be in education or training until they turn 18 This results in a more skilled workforce

Regulation can lead to unintended consequences and government failure   High costs of enforcement/ administration of laws Policing a compulsory recycling scheme would be difficult and expensive   Reduced profits of firms May compromise innovation and cause dynamic inefficiency   Can act as a barrier to entry discouraging smaller businesses Reduced competition   May create underground (illegal) markets which could generate even higher external costs on society May lead to regulatory capture

• Deregulation is the process of removing government controls from markets to increase competition and efficiency of markets

  • Royal Mail had a legal monopoly on delivering parcels in the postal market. Following deregulation in 2006, other firms entered the postal market, increasing consumer choice and improving service
  • The energy industry was deregulated and privatised in the 1980's. As a result of increased competition, consumers had more choice, lower prices, increased innovation (smart meters) and overall better services 

The Advantages & Disadvantages of Deregulation 

Advantages

Disadvantages

In some markets, deregulation promotes contestability in markets allowing lower prices for consumers Eg. In the airlines market, there are more low-cost airlines and in the telecom market, prices of telephone calls are falling   Increased competition can lead to greater efficiencies and lower costs of production Reduces excessive bureaucratic costs of regulation

May create a private firm with monopoly power as smaller companies are unable to compete Consumers may pay higher prices if the market is not regulated Private firms have an incentive to cut costs and provide a lower quality of service In the local bus market, deregulation often led to duplication of services and the problem of congestion Local buses are an industry where more than one firms creates different kinds of problems Deregulation of important industries, such as the airline industry, can lead to safety concerns