Question

(a) Name two theories of regulation, and state the objective for each.

(b) Describe the two pricing rules used in implementing the theories of regulation you named in (a) above.

(c) Compare and contrast the cost plus regulation and price cap regulation.

PLEASE HELP! THANK YOU.

Answer 1

There are two theories of regulation.

Public Interest Theory

It emphasises that regulation should maximise social welfare and that it is the result of a cost/benefit analysis.Cost benefit analysis is done to determine if the cost to improve the operation of the market outweighs the amount of increased social welfare. Two problems with public interest theory are (1) different theories arise regarding optimality of regulation, and (2) it is difficult for the legislature to ensure that regulator is not acting in its own interest and instead is acting in public interest.

  These problems lead to the Interest Group Theory, which emphasises that individuals form groups to protect their interests in regulation by lobbying. Interest groups are demanders of regulation and the legislature is the supplier of regulation. The legislature is also another interest group that seeks to retain power by “supplying” regulation to those “demanders” who will help them retain power. The regulatory body attempts to balance the interests of the different groups. The Interest Group Theory is a better indication of how regulation is actually made.