government-intervention-regulation-and-deregulation

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

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