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Government Regulation

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Roman Sheremeta, Ph.D.

Professor, Weatherhead School of Management

Case Western Reserve University

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Part 1: Government as a Solution

Part 2: Examples of Regulations

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Part 1: �Government as a Solution

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Government as a solution�

  • Government can be a key solution to many collective action problems:
    • Defense
    • Healthcare
    • Pollution
    • Hazardous behaviors
    • Resource depletion
    • Etc.

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  • But there are some challenges for good policymaking:
    • Mixed motives
    • Cannot make everyone happy
    • Expensive
    • Excessive regulations

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Mixed motives�

  • Good policymaking is a collective action problem in itself due to mixed motives:
    • Bureaucrats are more interested in themselves than policy outcomes.
    • Rent-seeking (Tullock, 1967), which relates to the investment of resources by firms and pressure groups in the expectation of securing economic privileges from politicians, can distort good policies.
    • Political business cycles create incentives for incumbent governments to manipulate the economic cycle to make it boom before an election.

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Cannot make everyone happy�

  • Arrow's impossibility theorem (Arrow, 1963):
    • Preferences of many individuals cannot be aggregated into social preferences without violating some basic axioms, such as non-dictatorship and Pareto efficiency.
    • Basically, you cannot make everyone better off.

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Expensive�

  • The US spends about 20% of GDP on different government programs:

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Excessive regulations�

  • Policymaking tends to be “polycentric”:
    • We need many policymaking organizations to solve collective action problems by encouraging individuals to cooperate.
    • And then, we also need rules to encourage policymakers and governmental bodies.
    • Also, government rules may produce unintended consequences.

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Part 2: �Examples of Regulations

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Regulations and rules�

  • Regulations and rules that solve collective action problems:
    • Setting emissions standards. The government also can indirectly limit outputs or inputs of production that causes emissions.
    • Fair labor standards.
    • Legal drinking age.
    • Speed limits and traffic tickets.
    • Etc.

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Taxes�

  • Taxes are involuntary fees levied on individuals or corporations and enforced by government.
    • Taxes can change the equilibrium quantity and price of a good or service.

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  • How taxes are used to solve collective action problems?
    • Taxing pollution with emission fees.
    • Tobacco taxes.
    • The alcoholic beverage tax.
    • Etc.

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Quotas�

  • Quotas are government-imposed restrictions that limit the number of goods or participants in the market.
    • Quotas can change the equilibrium quantity and price.

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  • How quotas are used to solve collective action problems?
    • Permit systems for mining, fishing, hunting, livestock raising, timber extraction.
    • Limits to pollution.
    • Laws in New York City restrict the number of yellow cabs, also known as “medallion cabs.”
    • Etc.

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Provision of public goods�

  • Government can directly provide public goods, thus solving the collective action problem:
    • Defense
    • Public education
    • Healthcare
    • Public transportation
    • Roads
    • Etc.

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References�

  • Arrow, K.J. (1963). Social choice and individual values. New Haven: Yale University Press.
  • Tullock, G. (1967). The welfare costs of tariffs, monopolies, and theft. Economic Inquiry, 5(3), 224-232.

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