14 CHAPTER
Regulation and Antitrust Law
After studying this chapter you will be able to
Explain the economic theory of government and how government activity arises from market failure and redistribution Define regulation and antitrust law and distinguish between the social interest and capture theories of regulation Explain how regulation and deregulation affect prices, outputs, profits, and the distribution of the gains from trade Describe the antitrust laws and review three of today’s antitrust policy debates
The Economic Theory of Government
The economic theory of government explains the purpose of governments, the economic choices that governments make, and the consequences of those choices. into a river that kills the fish downstream imposes an external cost.
A bank that builds a beautiful office building creates an external benefit.
The Economic Theory of Government
Governments and public choices deal with five economic problems: ▪ Monopoly and oligopoly regulation ▪ Externalities regulation ▪ The provision of public goods ▪ The use of common resources ▪ Income redistribution
External costs and external benefits prevent the market allocation of resources from being efficient.
The Economic Theory of Government
Provision of Public Goods A public good is a good that is consumed by everyone and from which no one can be excluded
The Economic Theory of Government
Monopoly and Oligopoly Regulation
Monopoly and oligopoly, and the rent seeking to which they give rise, prevent the allocation of resources from being efficient and redistribute the consumer surplus to producers. Governments regulate monopoly and oligopoly and enact antitrust laws that prevent cartels and other restriction on competition.
Governments exist for two main economic reasons:
1. To establish property rights and set the rules for the redistribution of income and wealth.
2. To provide a nonmarket mechanism for allocating scarce resources when the market economy results in inefficiency—a situation called a market failure.
The Economic Theory of Government
Externalities Regulation External costs and external benefits are consequences of an economic transaction between two parties that are borne or enjoyed by a third party.
Social Interest or Special Interests?
Natural monopoly is regulated. But does regulation work in the interest of all—the social interest—or in the interest of the regulated—special interests? Antitrust law restricts the actions of monopolies and blocks mergers. Do these laws serve the social interest or special interests?