What are the different instruments of government regulation ? Also discuss the various theories of regulation.
Ans. The different instruments of government regulation are as follows: i (1) Instruments of Regulation: (i) Control of price: this aims to prevent both predatory pricing and over charging. (ii) Control of quantity: universal service obligations, maxi- mum production limits. (iii) Control of entry: e.g. in long distance telecoms and NYC taxicabs. (iv) Control of quality: e.g. of emissions, customer services levels, safety, ete. (2) Theories of Regulation: There are two types of theories of regulation, i.e. positive theory and formative theory. Positive theories of regulation examine why regulation occurs. These theories of regulation include theories of market power, interest group theories that describe stakeholders' interests in regulation, public choice theories and theories of government opportunism that describe why restrictions on government discretion may be necessary for the sector to provide efficient services for customers. In general, these theories argue that regulation occurs because: (i) The government is interested in overcoming informational asymmetries with the operator and in aligning the operator's interest with the government's interest, (ii) Customers desire protection from market power when competition is non-existent or ineffective, (iii) Operators desire protection from rivals, or (iv) Operators desire protection from government opportun- ism.
Normative economic theories of regulation generally conclude that regulators should (i) Encourage competition where feasible, (ii) Minimise the costs of informational asymmetries by ob- taining information and providing operators with incentives to improve their performance, (iii) Provide for price structures that improve economic efficiency.
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