Regulation to Correct Market Failure content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class. Subtopics Intro and Analysis of Regulation Pros and Cons of Regulation

1. Regulation to
Correct
Market Failure
Lower 6th Micro
Government Intervention

2. Intro and
Analysis of
Regulation
Regulation
Mr O’Grady

3. Regulation
Definition: Government-imposed rules regarding the production or consumption
of goods or services.
Usually backed up legally by fines/prison sentences, etc.
Important Note: There are several different types of regulation
Therefore, there is no set way of analysing the impact of a regulation
You must consider each regulation individually
Selected Types of regulation:
Quota: a limit to the quantity
traded of a particular product.
E.g. EU fishing quotas
Price
Quantity
D = MPB
S = MPC
S1 = MSC
S + Quota
QFM
QSO
Bans/age limits: prevention of
trade of a product
E.g. Drinking age of 18+
Minimum standards: laws to
limit spill-overs
E.g. Health & Safety at Work Act
Price
Quantity
D = MPB
S = MPC
=MSC
D1 = MSB
S + Ban
QFM
QSO = 0
Price
Quantity
D = MPB
= MSB
QSO
S = MPC
QFM
S1 = MSC
S + Min.
standard

4. Pros and Cons
of Regulation
Regulation
Mr O’Grady

5. Pros and Cons of Regulation
Pros:
Simple to understand: quantifiable instructions to firms on what can/can’t be done
Gov. Revenue: Rule-breakers face heavy fines, giving gov. funds for cleaning up
Dynamic: Regulations can be gradually toughened each year, further reducing externalities
Overcomes inelasticity: Regulations are effective if demand is unresponsive to price changes
Cons:
Opportunity Cost: High cost of enforcement/administration, could be spent elsewhere
Gov Failure: Regulations can lead to unwelcome unintended consequences
(More on this in subsequent topic)
Hard on small business: The cost of meeting regulations can represent a significant share of
revenue. Puts firms off entry, restricting investment and lowers competition
Recessive: Regulations forcing people to buy certain goods (e.g. health insurance in USA) may
impose disproportionately heavy costs on poorer families

6. Where next?
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