Why does the government regulate industries

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Many sectors of the business world have long complained about government regulation. Corporations and their spokespeople often denounce government rules as irrational impediments to profits, economic efficiency, and job creation. Unsurprisingly, many firms have used loopholes , moved operations abroad, and violated antitrust laws as they attempted to deal with regulations.

In reality, American businesses have both prospered and suffered due to an ever-increasing number of rules and a complicated tax code. As a result, the relationship between firms and the government can be either collaborative or adversarial. More importantly, the rules have protected consumers from exploitative practices. Below, we'll look at some of these regulations to see why their impacts on businesses can be difficult to determine.

Congress passed the first antitrust law in and followed that with periodic changes in corporate tax rates and increasingly complex regulations governing business. The business community has generally opposed laws, regulations, or tax levies that it thinks impede its operations and profitability. A common argument against overregulation and excessive taxation is that they impose a net cost on society in the long run.

According to critics, government regulations slow disruptive innovations and fail to adapt to changes in society. Others argue that there are good reasons for regulation. In pursuit of profit, businesses have damaged the environment, abused labor, violated immigration laws, and defrauded consumers.

Proponents say that is why publicly accountable elected officials are in charge of regulation in the first place. Furthermore, some rules are essential for civilized competitive businesses to flourish. Few legitimate firms wish to engage in racketeering or participate in the underground market. In any case, we now have entities and regulations to limit the alleged excesses of the free market. Businesses complain about many of these rules while also lobbying to have other rules changed in their favor.

The act governs accounting, auditing, and corporate responsibility. Many in the business world opposed the bill, claiming that compliance would be difficult, time-consuming, and ineffective. Furthermore, they predicted that the law would not protect shareholders from fraud.

As with any regulatory approach, principles-based regulation must be well executed in order to work. A key element is that the principles should have clear meaning. They are just glittering generalities that offer no concrete guidance to a firm.

Businesses often use internal mission statements and lists of principles as a tool to align employees with the goals of top management. However, in many instances, the statements are so general that they have no implications for any particular way of conducting business.

The truly meaningful statements of corporate philosophy are those that provide strong signals of what type of business directions the firm will and will not take. Similarly, for PBR to work, the principles have to clarify rather than obfuscate. Legislative commentary should include specific examples of conduct that falls outside of the principles, in order to provide further guidance Principles-based regulation is not a cure-all. There are many regulatory problems that are better addressed with bright-line regulation.

For example, the algorithm for calculating the Annual Percentage Rate of interest should be standardized and clearly specified by regulators. And any regulatory system will have gaps and flaws. After all, those who design and implement regulations are as human as the people who run the businesses that they regulate.

But in an increasingly complex and fast-paced market environment, there are likely to be many regulatory issues where principles-based regulation will prove to be more robust. Burgemeestre et al. There is an ongoing debate in law and accounting about the relative merits of principle-based versus rule-based regulatory systems. In this paper we characterize what kind of reasoning underlies the two styles of regulation. We adapt an original account of Verheij et al.

The model is validated by a comparison between EU and US customs regulations intended to enhance safety and security in international trade.

Black et al. It is proposing a significant shift towards reliance on broadly stated Principles rather than more detailed rules. The implications of a more Principles-based approach for regulators, those regulated by the FSA and those whose interests the regulatory regime is designed to protect are the subject of ongoing dialogue The potential benefits claimed of using Principles are that they provide flexibility, are more likely to produce behavior which fulfils the regulatory objectives, and are easier to comply with.

Detailed rules, it is often claimed, provide certainty, a clear standard of behavior and are easier to apply consistently and without retrospectivity. They explain:. Because most global companies concentrate on making their systems operate as efficiently and functional as possible, they can lack the agility and appropriate mindset to navigate and manage reputational risk and its underlying drivers with alacrity. Compounding the challenge can be corporate dependence on rules-based compliance systems to manage risk.

These are situations in which agents are motivated by incentives that reflect legal, regulatory and political constraints rather than and frequently at the expense of moral and ethical imperatives.

Professor Caroline Kaeb at the University Connecticut Business School concludes that rules-based compliance systems possess far greater hidden costs that prevent maximum compliance at a level of economic efficiency. In addition, rules-based systems often pose design challenges. Their rules are over- or under-inclusive. Therefore, they are unsustainable since global risk has become fragmented and increasingly qualitative, simultaneously Many regulatory policy experts across the political spectrum call for better review of regulations after they are put in place to get rid of stale, outdated, and inefficient regulations.

The findings from ex-post, retrospective reviews could also serve to validate ex-ante assessments. Multiple presidents from both parties and with increasing emphasis over time have pushed for greater retrospective review of regulations via executive orders.

He mentions a detailed reappraisal a quintessential retrospective review of the cost and effectiveness of the rule mandating center high-mounted stop lamps on cars and light trucks, and the original prospective study that had randomly assigned vehicles to have the special stop lamps under consideration.

Orrin Hatch, Republican from Utah would establish a Retrospective Regulatory Review Commission to review and make recommendations to repeal rules or sets of rules that have been in effect more than 15 years. Congress would approve the full package of recommendations via joint resolution. These proposals are explicitly supported by former OIRA Administrator Susan Dudley and implicitly achieve policy goals laid out by many other regulatory policy experts. Their conception is that:. The [Regulatory Improvement] [C]ommission would consist of eight members appointed by the President and Congress who, after a formal regulatory review, would submit a list of regulatory changes to Congress for an up or down vote.

Congressional approval would be required for the changes to take effect, but Congress would only be able to vote on the package as a whole without making any adjustments. This is illustrated in Figure 6. The GAO report identified the major strategies and barriers that affect agency implementation of retrospective analyses:. Strategies: i establish a centrally coordinated review process to develop review plans; ii leverage existing regulatory activities to identify needed changes; iii use existing feedback mechanisms to identify and evaluate regulatory reforms; and iv facilitate tracking of reviews and interagency discussion and collaboration on best practices.

Agencies need to be forced to or more strongly encouraged to analyze data at regular intervals and in an impartial manner;. The regulatory system needs to better provide and align resources and incentives to undertake and enforce retrospective review. Who is responsible for designing and implementing regulations, and can that person or entity be trusted to pursue and enforce economically beneficial regulatory policy? Role clarity: An effective regulator must have clear objectives, with clear and linked functions and the mechanisms to coordinate with other relevant bodies to achieve the desired regulatory outcomes;.

Preventing undue influence and maintaining trust: It is important that regulatory decisions and functions are conducted with the upmost integrity to ensure that there is confidence in the regulatory regime. This is even more important for ensuring the rule of law, encouraging investment and having an enabling environment for inclusive growth built on trust;. Decision making and governing body structure for independent regulators: Regulators require governance arrangements that ensure their effective functioning, preserve its regulatory integrity and deliver the regulatory objectives of its mandate;.

Accountability and transparency: Businesses and citizens expect the delivery of regulatory outcomes from government and regulatory agencies, and the proper use of public authority and resources to achieve them. Regulators are generally accountable to three groups of stakeholders: i ministers and the legislature; ii regulated entities; and iii the public;.

Engagement: Good regulators have established mechanisms for engagement with stakeholders as part of achieving their objectives. The knowledge of regulated sectors and the businesses and citizens affected by regulatory schemes assists to regulate effectively;. Funding: The amount and source of funding for a regulator will determine its organization and operations.

It should not influence the regulatory decisions and the regulator should be enabled to be impartial and efficient to achieve its objectives;. Performance evaluation: It is important that regulators are aware of the impacts of their regulatory actions and decisions. This helps d rive improvements and enhance systems and processes internally.

It also demonstrates the effectiveness of the regulator to whom it is accountable and helps to build confidence in the regulatory system. Stakeholder engagement is an important ingredient in the good governance of regulators. Steven J. Balla and Susan E. Through this site, you can find, read, and comment on regulatory issues that are important to you. Balla and Dudley also describe how advances in internet technology and access have inspired some non-profit and academic institutions to develop their own innovative approaches to interfacing with stakeholders and the general public regarding regulatory policy.

But despite the recent progress, Balla and Dudley conclude that the current state of stakeholder participation in rulemaking is mostly a one-way street. Descriptions of regulatory policies in the pipeline are provided to the public and comments are solicited, but there is little evidence that feedback collected via public comment is systematically accounted for in actual decision making:. Our review demonstrates that there are extensive opportunities for stakeholder participation at all stages of the regulatory process.

These opportunities, however, are typically oriented toward facilitating the provision of information on the part of stakeholders. Susan E. Edward Aiden, Bernard L. Maeve P. Cary Coglianese, Adam M. Philadelphia: University of Pennsylvania Press, New York: Little, Brown and Company, Robert W. Hahn and Paul C. Kevin A Hassett and Robert J.

Joseph S. Manufacturing Declining? Adam Smith, The Wealth of Nations. Washington, DC: Cato Institute, Washington, DC: Cato Institute, , p. Lawrence M. Kevin A. Hassett and Robert J.

Ehrlich, Jeffrey A. Eisenach, and Wayne A. Yoo, U. Accessed June 14, Barack Obama. January 18, July 11, The funds collected go to pay for the government programs that perform the oversight of the particular industry.

However, in many cases, some portion of revenue is also sidetracked to general government purposes and is, effectively, a tax. Regulation of business in the 20th century has developed at multiple government levels through the form of commissions.

Government departments and agencies are still heavily involved. However, commissions are seen as more responsive, and board members can, in many cases, be from private industry, providing a receptive face to business interests in government.

Doing so also provided the government with decisions-makers who intimately understood business issues and how they may conflict with new regulations or changes. This approach also allows for a much cheaper resolution of legal conflicts than taking regulation challenges to the court system through a formal lawsuit. Experiments in government in getting out of the business of regulation, i. Sample Legislation and Regulation. Regulation by Contract—a new way to privatize electricity distribution?

Water Sector Regulation. Regulating Water Services for all in developing countries. Regulation is the monitoring and control of a sector or business by Government or an entity appointed by Government. Direct and indirect controls and limitations are imposed upon the regulated entity. Regulation tends to be categorized into economic regulation and other forms of regulation. Most utility and infrastructure providers have traditionally been natural or legal monopolies.

A natural monopoly arises where it is much more efficient for one supplier to provide services, such as a water utility. A legal monopoly is a supplier that has been granted the sole legal right to supply services. In any monopoly supply situation, whether involving the private sector or otherwise, there is potential for consumers to be adversely affected by the monopoly supplier, whether through excessive charging or in terms of poor service, interruptions in service, etc.

Effective regulation can protect against abuse by the monopoly and create incentives to improve services. Government must monitor services outsourced under a PPP arrangement. Therefore, the Government needs to retain sufficient capacity to monitor and enforce the operator's obligations. A Regulator can provide a home for such capacity and a mechanism to enable the Government to monitor and enforce.

When services are outsourced to the private sector, there is a natural asymmetry of information between the regulated entity and the Government. Regulation can help to restore the balance of information. As explained below, there are other interests which are deemed important to protect through regulation, such as the environment, service standards, consumer services, asset maintenance and replacement, etc.

Regulation is a means to an end—what matters are outcomes and not regulatory rules. Care should be taken when designing a Regulatory Framework to avoid developing a series of comprehensive and sophisticated rules which look great on paper but which are difficult and impractical to implement and are not necessarily tailored to the circumstances at hand.

In developing countries, in particular, the most effective rules are likely to be simple and easy to implement, with a light burden imposed on both regulator and regulated entity. The benefits of regulation should exceed the cost of regulation. When designing the Regulatory Framework , the potential costs of monitoring activities and data collection to all parties involved should not be forgotten.

Where there are a number of regulatory bodies responsible for regulating the sector, care should be taken to try and reduce duplication of information to be collected, audits required, etc. While it may be economically viable in the UK market to have separate audited accounts drawn up for company registration and for regulatory purposes, this may not be sensible in a developing economy.