Theories of Economic Regulation

This paper summarizes the public interest theory and capture theory of economic regulation.

Running Head: ECONOMIC THEORIES
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ECONOMIC THEORIES 2
Introduction
There are several theories that have been advanced to explain the government regulation
of the economy. The theories include the public interest theory and the capture theory. This
paper summarizes the two theories. Theories require in-depth research before they are accepted.
The major challenge in social theory is economic regulation from the government.
Public Interest Theory of Regulation
Here, two assumptions seem to have taken place from the economic policy perspective
from the period of the enactment of the first thought of economic policy. One assumption is that
markets are highly fragile and they do not function efficiently if left alone. The second
assumption is that government intervention is costless. Government intervention is therefore
present due to public demand and the regulations are meant to regulate the inefficiencies in the
market. The regulation in most cases applies to the industries that are highly concentrated and
which generate external benefits (Richard , 1974). Research shows that regulation has no
correlation with the external economies or diseconomies of scale. Particular schemes of
government regulation cannot be explained on the basis of increasing wealth or by the standards
of fairness.
Empirical evidence is challenged on the basis of the disappointing performance of the
regulatory process. The public interest theory when reformulated argues that the regulated
agencies are bona fide public intentions but the purposes are not met due to mismanagement. The
reformulation is unsatisfactory in the sense that it fails to account for a good deal of evidence the
undesired outcomes are frequently desired by people influential in the enactment of the
regulatory scheme (Richard , 1974). The second thought on the failure is that there has been
weak evidence of mismanagement from the agencies and much of this is consistent with the rival
theory. The regulatory agency operates with a purpose to reach inefficiency in their goals. There
is also no pervasive theory that has been proposed to explain why agencies should be expected to
be less efficient than other organizations. The motivation from employees of any agency or
business firm is that both like advancement and none work with the aim of being fired. People
want to demonstrate possession of excellence in what they do so as to improve prospects of
superior private employment (Richard , 1974). The agencies’ staff is answerable to both the
legislature and executive branches on the matters of rewarding and promotion of the employees.
The legislature oversights on these agencies are not highly emphasized.

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Regulation is a good move but in most cases, it is not a successful attempt in the
promotion of public interest after the introduction of the intractable character of the many tasks
assigned and the cost of legislation in the agencies performance. There are several assumptions
in the public theory interest; first, there is no mechanism in the theory by which the perception of
public interest is translated into legislative action. Policies enacted by 51 percent of the voters
have always had consequences on the other 49 percent of the voters and in most cases; the
majority are confronted between principle and interest (Richard , 1974). There is also collusion
among politicians. There are barriers to the formation of many parties in this case and hence the
parties remain to be only two. The most influential politicians can use their monopoly power to
obtain large incomes.
Capture Theory
This theory argues that economic interest is a process by which interest groups promote
their interests but not for the interests of the public. Marxist and Muckrakers identified and
summarized these interests as big business, the capitalist control the institutions in our society
including regulation. The capitalists, therefore, control regulation. The syllogism about control of
personal interests is false (Richard , 1974). A great deal of economic regulation serves very few
businesses or even non-business groups. These forms of regulations are in most cases not
explained in the capture theory.
Political Scientist’s Formulation
A more interesting form of capture theory derives from political science. Political science
emphasizes the importance of interest groups in the formation of public policy. Political
scientists came up with the interest of the public interests in the formulation of public policies
but their work in most cases is kept theoretical. The scientists do not inform us why a portion of
the interests is effectively presented while the other portion is not. Some political scientists have
proposed rudiments of usable theory (Richard , 1974). The capture theory states that over-
regulation can be dominated by some industries that are regulated. This formulation singles out
specific interest group as prevailing in the struggle to influence regulation and also give a
prediction of a regular sequence to influence legislation body. Some political researchers have
proposed the basics of usable hypothesis. The capture hypothesis states that over guideline can
be ruled by certain enterprises that are directed (Richard , 1974). This plan singles out explicit
intrigue bunch as overall in the battle to impact guideline and furthermore give a forecast of a
standard arrangement to impact enactment body.
The capture theory is not satisfactory. It is not distinguishable from the other versions of
public interest theory. It is also presumed that the capture theory is not just a real theory but
hypothetical since it lacks a theoretical basis. The ‘theory ‘also fails to answer the following
questions. There is no reason for characterizing the interaction between the regulatory agencies
with the regulated firm. There is also no reason as to why the regulated firm is the only center of

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focus. The clients of the regulated industry may have different interest that may not be able to
capture the agency on matters of effectiveness (Richard , 1974). There is also no given reason as
to why the existing industries are only able to capture the existing agencies and not able to
procure an agency that will cater to their interests effectively. The capture theory does not
answer the above questions and it is also contradicted by three important bodies of evidence;
The theory loses its explanatory power when an agency controls separate industries that
have conflicting interests. The ICC, in this case, is a good example since it regulates opposing
mockups of transportation and the theory, in this case, does not clarify which group ICC is
expected to favor (Richard, 1974). There are very many competing groups within the model and
the interests of one differ with the interest of the other group. For instance, the interests of trunk
airlines are different from the interests of CAB and therefore the agency does not know or
explain which one to favor. The capture theory also ignores many interests that are promoted by
regulatory organizations. There are very many instances of regulatory policies that are very
specific and also characteristics of regulatory processes that seem best explained by referring to
the influence on the process of regulation of the different interest groups (Richard, 1974). Some
structural characteristics of the regulatory processes also seem to be best explained by the
influence they have to the regulatory process of the interest groups which are made up of
customers of the regulated body.
Conclusion
There are a number of criticisms of the public interest theory of regulation and also the
capture theory. These criticisms conceive regulation as a service that is provided to the effective
political agencies. None of the above-discussed theories has substantive support. The theories
have not been able to generate a hypothesis that is sufficient so that it can be verified empirically.
References

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Richard , A. P. (1974). Theories of Economic Regulation. The Bell Journal of Economics and
Management Science, 5(2), 335-352.