Question

What are the cost of overregulation and underregulation of equity markets? the solution I found on Chegg does not really explain anything

Answer 1

There is a fine line between over and under regulation, where over regulation hampers innovation and under regulation can lead to widespread mismanagement.

The Securities and Exchange Commission (SEC) regulates the securities markets and is tasked with protecting investors against mismanagement and fraud. Ideally, these types of regulations also encourage more investment and help protect the stability of financial services companies. This does not always work, as the financial crisis of 2007 demonstrated. The SEC had relaxed the net capital requirement for major investment banks, allowing them to carry significantly more debt than what they had in equity. When the housing bubble imploded, the excess debt became toxic and banks started to fail.

Government regulation has also been used in the past to save businesses that would otherwise not survive. The Troubled Asset Relief Program was run by the United States Treasury and gave it the authority to inject billions of dollars into the U.S. financial system to stabilize it in the wake of the 2007 and 2008 financial crisis. This type of government intervention is typically frowned upon in the U.S., but the extreme nature of the crisis required quick and strong action to prevent a complete financial collapse.