1.

Nature of Regulation
a. “Regulation”
i. Used to indicated any form of behavioral control, whatever the origin
ii. Central meaning of regulation: a sustained and focused control exercised
by a public agency over activities that are valued by a community
iii. Regulation is fundamentally a politico-economic concept that can be best
understood by reference to different systems of economic organization
and the legal forms which maintain them
iv. In all industrialized societies, there is tension between 2 systems of
economic organization
1. Market System – individuals and groups are left free, subject only
to certain basic restraints, to pursue their own welfare goals
a. Characteristics:
i. Facilitative function: it offers a set of formalized
arrangement with which individuals can ‘clothe’
their welfare-seeking activities and relationships
1. This arrangement carries with it mutual
rights and obligations, which the court will
enforce if necessary
ii. Private: although the law may be said to control
conduct, the fact that it is private renders it distinct
form regulation in 2 fundamental aspects:
1. It is left to individuals and not the state to
enforce rights and obligations are incurred
voluntarily in the sense that they can always
be displaced by agreements between the
affect parties, if they are found to be
inappropriate
2. The law is largely decentralized
b. It is improper to identify the market system exclusively with
private, facilitative, and decentralized law as no society can
exist without the state providing for a minimum degree of
order and security
c. Regulation is now always directive, public, and centralized
d. In some areas, it is formulated and enforced by self-
regulatory agencies, rather than by a public body.
2. Collectivist System – the state seeks to direct or encourage
behavior which (it is assumed) would not occur without such
intervention.
a. Goal: to correct perceived deficiencies in the market system
in meeting collective or public interest goals
b. If ‘regulation’ is used to denote the law which implements
the collectivist system, what are the characteristics and
 how do these compare with the characteristics of law under
the market system?
i. Regulation contains the idea of control by a superior
(directive function) – individuals are compelled by a
superior (state) to behave in a certain way with
threat of sanctions if failed to comply
ii. It is public law: it is for the state (or its agents) to
enforce obligations which cannot be overreached by
private agreement between the parties concerned.
iii. Centralized as the state plays a fundamental role in
the formulation, as well as the enforcement of the
law

II. Theories of Regulation and Economic Reasoning

1. Public interest theory of regulation
a. Attributes to legislators and others responsible for the design of regulation a
desire to pursue collective goals
b. Difficult to validate this assumption since the study of motivation is elusive and an
impossible task – laws are made by not just one person and there are often
conflicting expressions of what was intended
2. Private interest theory of regulation
a. Hinged on how the laws are politically influenced by private interest groups to
secure for themselves regulatory benefits

III. Scope and Form of Regulation

1. Regulation covers a huge variety of industrial and non-industrial activities which involve
a number of different legal forms
a. Social Regulation
i. Public justifications for social regulation, which deals with such matters as
health and safety, environmental protections, and consumer protection,
center on 2 types of market failure:
1. Individuals in an existing, potential, contractual relationship with
firms supplying goods or services have inadequate information
concerning the quality offered by suppliers
a. This would result to the unregulated market’s failure to
meet their preferences
2. Even if this information problem does not exist, market
transactions may have spillover effects or externalities which
adversely affect individuals who are not involved in the
transactions.
ii. To deal with this type of market failures, policy makers choose from a
range of regulatory instruments classified according to the degree of state
intervention required.
1. Degree of low intervention (3 regulatory forms):
 a. Information regulation
i. Forcing suppliers to disclose details concerning the
quality of their goods and services
b. Private regulation
i. Imposing obligations which nevertheless can be
enforced only by the individuals for whose benefit
they have been created
c. Economic instruments
i. Not coercive but induce desirable behavior by
financial incentives
2. Highly interventionist instrument of prior approval
a. Prohibits the undertaking of any activity without a license
or authorization issued by an agency
3. Command-and-Control
a. The middle of low intervention and high intervention
b. Standard, backed by criminal sanctions, are imposed on
suppliers
b. Economic Regulation
i. Covers a much narrower range of activities than social regulation
ii. Applies primarily to industries with monopolistic tendencies
iii. GR: Monopolies are undesirable
E: under special conditions, “natural monopoly” may exist where it is
economically preferable for there to be a single supplier.
1. In such instance, when a firm is granted monopoly rights, it will not
be subject to discipline normally provided by competition
2. In consequence, it may over price its products, fail to meet
consumer preferences regarding quality, and lapse into
inefficiency.
iv. Principal function of economic regulation: to provide a substitute for
competition in relation to natural monopolies. 3 alternative forms:
1. The firm can be publicly owned: it is expected that the mechanics
of political direction and accountability will be sufficient to meet
public interest goals
2. The firm may remain in, or be transferred to, private ownership but
is subjected to external constraints in the form of price & quality
regulation
3. Firms desiring to obtain a monopoly right may be forced to
compete for it
a. Part of the competitive bid, they may be required to
stipulate proposed condition of supply, relating to prices
and quality = conditions become terms of the license or
franchise under which they exercise the monopoly right