The Regulatory Tools

The regulatory and government policies should be predictable, contemplative, and effective in reaching their goals. This is because it is challenging for any business entity to operate in an environment governed by an uncertain regulatory system. In other words, regulators should tailor their tools to ensure a stable regulatory environment.  

The main regulatory tools and  government interventions include:

1. Use of Price Mechanisms

A good example of a price mechanism is taxing polluters while subsidizing those who engage in environmentally friendly production procedures.

2. Public Financing of Private Projects

Public financing can include the provision of loans to individual investors or firms whose activities the government supports. However, the level of funding depends on factors such as political ideologies, the government in power, its structure, and a country’s GDP.

3. Regulatory Mandates and Restrictions on Behaviors

Examples of mandating include banks’ capital requirements and registration with a securities commission for certain operations. Restricted activities include insider trading and short selling.

4. Provision of Public Goods and Services

Public goods are services an individual can consume without reducing their availability to others. As such, no one disadvantages others when they consume such goods and services. Some of the public goods include infrastructure and national defense (security).

Question

Which of the following is a regulatory tool that self-regulating organizations are least likely to use?

1. Provision of public goods.
2. Restrictions of behaviors.
3. Price mechanisms.

Solution

The correct answer is C.

SROs regulate the actions of their members and provide public products in the form of standards and regulation of their members’ activities. They are unlikely to use price mechanisms.

Reading 10: Economics of Regulation

LOS 10 (g) Describe tools of regulatory intervention in markets.