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Economic Impacts of Regulation
Regulation is a written instrument that contains rules with the force of law (Ogus, 2004). Regulation as a process involves monitoring and enforcing rules, established through primary or delegated legislation. Regulation usually creates, constrains or limits a right. In addition, regulation creates and limits a duty besides allocating responsibilities (Ogus, 2004). Regulation may take several forms depending on its application. These includes legal restrictions made by the government, contractual obligations, which binds several parties together, self-regulations by industries, third party regulation, co-regulation, market regulation, certification and accreditation
Regulation made by a state tries to produce outcomes that might not occur (Ogus, 2004). In addition, it attempts to prevent or produce outcomes in various places to what might occur. Through this, regulation becomes an implementation object of policy statements. Examples of regulation include controls on prices, market entries, wages, pollution effects, employment of particular people within certain industries, development approval, the military forces and services and production standards for particular goods (High, 2001).
Public services usually encounter conflicts between procedures of maximizing profits and people's interests on these services. Therefore, most of the governments have various forms of control or regulation for the purpose of managing these possible conflicts (High, 2001). This regulation ensures deliverance of appropriate and proper service. The regulation does this without discouraging the proper functioning as well as development of the business. For instance, regulation in most countries controls the sale of prescription drugs and alcohol (Amato & Laudati, 2001). It also controls key sectors in the economy such as a food business, public transport, and provision of personal and residential care, film and TV. In addition to these, the regulation controls monopolies and the financial sector of the country (High, 2001). With regards to this, the objective of this paper is to identify the impacts of regulation on various sectors of the economy.
A wide variety of literature review indicates that regulation frequently has significant impacts on the economy. However, it is not possible to generalize prepositions about the impacts of economic regulation (High, 2001). The literature review indicates that the nature, as well as the magnitude regulatory impacts, varies significantly depending on the structure of the process of regulation.
The impacts of regulation on the economy usually differ substantially from the predictions of public interest model. This model presumes that the intension of regulations is to ameliorate imperfections in the market and enhancing efficiency in the market. The same review indicates that the impacts regulations on prices in a regulated market having several competing firms are more complex. In some industries such as airline and insurance, introduction of entry and price regulation is for the purpose of protecting incumbents for competition (Grabowski, 2009).
The economic impacts of regulation depend on various factors (Ogus, 2004). These include the motivation for regulation, the structure of the regulatory process, the nature of instruments of regulation, the economic characteristics of the industry, and the political and legal environment of the regulation (Loayza, Serven, Oviedo, & World Bank, 2005). Given the significant variations in these institutional, as well as economic characteristics, the possible impacts of regulation are likely to significantly differ across time and industry
Extensive research on the impacts of regulation on economy proceeds from various points-of-view. At one extreme is the prescriptive research that focuses on introduction time of the regulation as well as the optimal form of regulation. At the other extreme is the descriptive perspective research which focuses on legal, economic, political and bureaucratic forces, which lead to regulation of the government (Loayza, Serven, Oviedo, & World Bank, 2005). In addition, it also has effects on the performance and behaviors of regulatory institutions. With regard to this, there are several impacts of regulation on different aspects of the economy.
While the potential impacts of regulation on the economy as employment are of important, such an evaluation has limitations in assessing their merits. Regulation has various purposes including protecting people as well as the environment from harm.
Regulation on prices has a significant impact on the economy. Depending on the industry, time period, for comparison, and type of regulation, regulation increase and decrease prices, and change the structure of prices in many different ways (Loayza, Serven, Oviedo, & World Bank, 2005). At times, regulation has no significant impact on prices at all. The impacts of regulation on prices therefore, depend on the economic and regulatory characteristics of different industries in the economy.
The direct costs of complying with the regulation usually lead to increased employment (Ogus, 2004). For, instance, a regulation on the environment will imply more jobs to those engaged in pollution control. In addition, there are high possibilities that regulation may lead to the development of more labor-intensive processes of production. Under this, it is a fact that direct employment has impacts of regulation should consider both jobs gained and jobs lost.
Regulation usually has a wide economic benefit which may not seem significant at first blush (Loayza, Serven, Oviedo, & World Bank, 2005). For instance, air regulations always improve the health of workers as well children. This results to lower health care costs which in turn lead to more productive workers. On this, the economic benefit is evidence as productive workers helps in developing the economy of a country.
In most cases, regulations usually spur technological innovations leading to increase in productivity. Properly designed environmental regulations always lead to a lot of innovations. This in return results to fully offsetting of the compliance costs (Amato & Laudati, 2001).
Weak or lack of regulations can be a significant threat to employment and the economy at large (Ogus, 2004). It is a fact that inadequate regulations results to collapsing of financial markets and occurrence of environmental disasters. In addition, it can result to diminishing of sales due to consumers losing faith in the products of a particular industry. This implies that regulatory failures may harm the economy of a country while strong regulations may facilitate the functioning of the market (Loayza, Serven, Oviedo, & World Bank, 2005). Therefore, well established regulations are necessary in producing stable as well as flourishing job markets.
It is the function of regulations to ensure that firms or industries at large do not carry out activities or even act in ways that can place unnecessary costs on outside firms or the on the larger society. For instance, manufacturers could pollute the environment at will sometimes back. With regulations put in place, laws demands manufacturers to reduce pollution and to customize on their production processes for the purpose of disposing waste effectively (Grabowski, 2009). This is of considerable benefit to both public and private sector. Research from economists indicates that regulations have helped in overcoming much of air pollution.
In most cases, development of regulatory standards is usually over a long period of time with great opportunities for input as well as the business community review (Loayza, Serven, Oviedo, & World Bank, 2005). This therefore, diminishes uncertainty. Regulations may also establish operating rules, which diminish the uncertainty of the firm. The main reason behind the reduction in the rate of investment by firms today is not the uncertainty in regulations, but it is because of continued imbalance between supply and consumer demand.
When there is the reduction in labor markets with organizations generally having significant surplus cash, there is increase in spending in order to comply with regulation that may be beneficial to the creation of jobs. Assessments of the economic impacts of certain regulations should weigh all competing factors against each other (Loayza, Serven, Oviedo, & World Bank, 2005). There is no theoretical fact that regulation necessarily has negative impacts on the economy.
The distribution impacts of regulations play a significant role in trying to explain the incidence of regulation, as well as…[continue]
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