Save 30% on all 2023 Study Packages with Code: BLACKFRIDAY30. Valid until Nov. 28th.

Benefits and Costs of Regulation

Benefits and Costs of Regulation

It is a usual practice for regulators to evaluate the cost-benefit of the regulatory suggestions. The essence of such evaluation is to determine the trade-offs related to regulatory action and suggest alternative solutions.

Regulators rely on economic principles when developing methods to measure a regulation’s costs and benefits. However, the cost-benefit analysis of the regulatory system is a bit challenging. In determining the cost-benefit analysis of regulation, it is easier to determine the cost of regulation.

Costs of Regulation

  1. Regulatory burden (also called private or government burden): These are the costs of regulation incurred by the party upon which a regulation is imposed.
  2. Net regulatory burden: These are the private costs of regulation less the private benefits of regulation.
  3. Implementation costs of regulation: An example is a cost incurred in hiring compliance lawyers.
  4. Indirect costs: These are the costs associated with how economic decisions and actions are changed and varying the market allocations.
  5. Unintended cost: These costs can be divided into implementation and indirect costs that were not forecasted.

Lastly, it is worth noting that determining the costs and benefits of regulation is a challenging feat when done prospectively, and not retrospectively. It is relatively simple to make an informed decision via the retrospective method, since before and after outcomes can be compared. Alternatively, a pilot study can be done to analyze the possible impact of a proposed regulation.

Question

Which of the following statements is most likely to be true about the cost-benefit analysis of regulation?

  1. Regulatory costs and benefits are easier to determine prospectively (after-the-fact basis).
  2. The net regulatory burden is the private cost of regulation plus the private benefits of regulation.
  3. Both statements are true.

Solution

The correct answer is A.

The actual costs and benefits can be comprehensively determined by carrying out a retrospective factual analysis, which allows for a concrete judgment to be made.

B is incorrect. The net regulatory burden is the private cost of regulation less private benefits of regulation.

Reading 8: Economics of Regulation

LOS 8 (h) Describe benefits and costs of regulation

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop GMAT® Exam Prep


    Daniel Glyn
    Daniel Glyn
    2021-03-24
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    2021-03-18
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.
    Nyka Smith
    Nyka Smith
    2021-02-18
    Every concept is very well explained by Nilay Arun. kudos to you man!
    Badr Moubile
    Badr Moubile
    2021-02-13
    Very helpfull!
    Agustin Olcese
    Agustin Olcese
    2021-01-27
    Excellent explantions, very clear!
    Jaak Jay
    Jaak Jay
    2021-01-14
    Awesome content, kudos to Prof.James Frojan
    sindhushree reddy
    sindhushree reddy
    2021-01-07
    Crisp and short ppt of Frm chapters and great explanation with examples.