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Hertog, Johan den --- "Economic Theories of Regulation" [2012] ELECD 433; in Van den Bergh, J. Roger; Pacces, M. Alessio (eds), "Regulation and Economics" (Edward Elgar Publishing, 2012)

Book Title: Regulation and Economics

Editor(s): Van den Bergh, J. Roger; Pacces, M. Alessio

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781847203434

Section: Chapter 1

Section Title: Economic Theories of Regulation

Author(s): Hertog, Johan den

Number of pages: 72

Extract:

1 Economic theories of regulation
Johan den Hertog



1. INTRODUCTION

There are two broad traditions with respect to the economic theories of regula-
tion. The first tradition assumes that regulators have sufficient information and
enforcement powers to effectively promote the public interest. This tradition
also assumes that regulators are benevolent and aim to pursue the public inter-
est. Economic theories that proceed from these assumptions are therefore often
called `public interest theories of regulation'. Another tradition in the economic
studies of regulation proceeds from different assumptions. Regulators do not
have sufficient information with respect to cost, demand, quality and other
dimensions of firm behavior. They can therefore only imperfectly, if at all,
promote the public interest when controlling firms or societal activities. Within
this tradition, these information, monitoring and enforcement costs also apply to
other economic agents, such as legislators, voters or consumers. And, more
importantly, it is generally assumed that all economic agents pursue their own
interests, which may or may not include elements of the public interest. Under
these assumptions there is no reason to conclude that regulation will promote the
public interest. The differences in objectives of economic agents and the costs
involved in the interaction between them may effectively make it possible for
some of the agents to pursue their own interests, perhaps even at the cost of the
public interest. Economic theories that proceed from these latter assumptions are
therefore often called `private interest theories of regulation'.
Fundamental to public interest theories are market failures ...