Chapter 10

Regulation of Business

Details the reasons for government regulation of business Discusses the historical and current patterns of regulation Describes how regulations are made Discusses the overall costs and benefits of regulations

This chapter:

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Annals of Regulation: The FCC Fines CBS

Opening Case The Federal Communication Commission (FCC) fined CBS

$550,000 for its indecent broadcast during halftime of Super Bowl XXXVIII.

The FCC received a record 540,000 complaints regarding the halftime show.

The FCC was created by the Communications Act of 1934 to bring order to the nation’s airwaves.

The FCC is forced to be tentative in its censorship of indecency, because the First Amendment protects the free speech of artists.

This drama is one of thousands of similar, but less well known, interactions of regulator and regulated that occur every year.

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Underlying Reasons for Government Regulation in the Private Sector

Government regulation of the private sector is justified under two circumstances: When flaws appear in the marketplace that

product undesirable consequences. When adequate social, political, and other

reasons for government regulations exist.

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Flaws in the Market

Natural monopoly Destructive competition Externalities Inadequate information

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Social and PoliticalReasons for Regulation

Socially desirable goods and services Socially desirable production methods Resolution of national and global

problems Regulation to benefit special interests

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Waves of Growth: Wave 1

During this period, regulations were predominantly promotional for business.

Early offices that performed regulatory functions were the Patent and Trademark Office (1836), the Copyright Office (1870), and the Bureau of fisheries (1871), and the Comptroller of the Currency (1863).

Two Supreme Court decisions in 1819 confirmed the supremacy of federal law over state law and laid more groundwork for extensive federal regulation in later eras.

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Waves of Growth: Wave 2

In 1887 Congress built the prototype of the modern federal regulatory authority when it created the Interstate Commerce Commission (ICC) to regulate railroads.

It was an independent regulatory commission In 1914 the Federal Trade Commission

(FTC) was established in response to the large, dominant trusts in many industries.

By the early 1930s there were seven more new federal agencies and commissions regulating business.

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Waves of Growth: Wave 3

To deal with the economic catastrophe of the Great Depression, President Roosevelt proposed the New Deal a series of programs to bring “Relief, Recovery, and Reform.”

The new laws were quickly challenged in the courts and the Supreme Court, in a unanimous decision, declared the National Industrial Recovery Act to be unconstitutional.

Outraged and frustrated, Roosevelt sent Congress a plan to change the Court by appointing one new justice for every justice over age 70 who didn’t retire. The plan would die in Congress, but had its intended

effect.

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Waves of Growth: Wave 4

In the late1960s and early 1970s a groundswell of interest in improving the quality of life resulted in new controls designed to achieve broad social objectives.

Several new independent commission were created including the Equal Employment Opportunity Commission (1964), the Consumer Product Safety Commission (1972), and the Nuclear Regulatory Commission (1974).

Most of the new agencies were executive agencies. The buildup of regulations to achieve social objectives

existed simultaneously with a deregulation movement that focused on removing or streamlining older economic regulations.

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War Blips

Civil War – there was limited control over production and prices, but the North created the National Banking System to help finance the war.

World War I – introduction of substantial controls over industry, but the war ended before the controls began to bite.

World War II and to a lesser extent the Korean War – wartime controls were completely abandoned.

Vietnam War and wars in the Middle East – no comparable increase in regulation.

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How Government Regulations are Made

All federal regulation originates in an act of Congress.

A bill is a proposed piece of legislation placed before the Congress for its approval.

When a bill is passed by both houses of Congress and signed by the president its provisions become law.

It is then the responsibility of the appropriate regulatory agency to create the specific regulations (rules) needed to implement the provisions of the bill (rule making).

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Regulatory Agencies and All Three Branches of Government

Influence Regulations Regulatory agencies create the regulatory rules. A rule is a

decree developed by an agency to implement a law passed by Congress.

Presidents have used many devices to limit and direct regulation including executive orders, favorable appointments of agency administrators, and central review of regulations in the White House.

Congress approves presidential nominees as head regulators and approves agency budgets.

Federal courts have the power to hold unlawful agency actions that are arbitrary, capricious, unconstitutional, in excess of agency jurisdiction, or unsupported by evidence.

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The Regulatory Burden

Total dollar costs of regulation were $843 billion in the year 2000 (8.6 percent of the total GDP) and rose to $1.1 trillion in the year 2004 (11 percent of total GDP).

Small businesses bear a disproportionately large share of the federal regulatory burden.

Other costs of regulation also large but are indirect and much more difficult to quantify.

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Administrative Costs of Regulation

Update with Figure 10.4

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Benefits of Government Regulation

Regulation has helped to: Improve the position of minorities Clean the environment Prevent monopoly Reinforce free competition Prevent corruption Strengthen the banking system Reduce industrial accidents Provide resources for the elderly Control communicable diseases

These benefits are enormous and incalculable

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Regulation in Other Nations

The World Bank conducted a study to catalog, classify, compare, and evaluate regulations in every nation. Four basic findings were: Regulation varies widely around the world. Poor countries regulate business the most. Rich countries regulate business in a consistent

manner while poor countries do not. Developed countries engage in continuous

regulatory reform while there is thus reform in developing countries.

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Principles of Good Regulation

1. Simplify and deregulate in competitive markets.

2. Focus on enhancing property rights.

3. Expand the use of technology.

4. Reduce court involvement in business matters.

5. Make reform a continuous process.

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Concluding Observations

There have been ups and downs in the trend of regulations, but the basic direction has been up, with respect to both total volume and complexity.

Successive efforts of presidents have not succeeded in slowing the expansion of regulation, but have produced needed reforms.

The cost of federal regulations is huge, but the cost is offset in significant degree by the many benefits of regulation to society as a whole, individuals, companies, and industries.

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