McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 10

Regulation of Business
This chapter:

Details the reasons for government regulation of business

Discusses the historical and current patterns of regulation
Describes how regulations are made
Discusses the overall costs and benefits of regulations

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Annals of Regulation:
The FCC Fines CBS
Opening Case
The Federal Communication Commission (FCC) fined CBS
$550,000 for its indecent broadcast during halftime of Super
Bowl XXXVIII.
The FCC received a record 540,000 complaints regarding the
halftime show.
The FCC was created by the Communications Act of 1934 to
bring order to the nations airwaves.
The FCC is forced to be tentative in its censorship of
indecency, because the First Amendment protects the free
speech of artists.
This drama is one of thousands of similar, but less well
known, interactions of regulator and regulated that occur
every year.
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Underlying Reasons for Government

Regulation in the Private Sector
Government regulation of the private
sector is justified under two
circumstances:
When flaws appear in the marketplace that
product undesirable consequences.
When adequate social, political, and other
reasons for government regulations exist.

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Flaws in the Market

Natural monopoly
Destructive competition
Externalities
Inadequate information

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Social and Political

Reasons for Regulation
Socially desirable goods and services
Socially desirable production methods
Resolution of national and global
problems
Regulation to benefit special interests

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Waves of Growth: Wave 1

During this period, regulations were
predominantly promotional for business.
Early offices that performed regulatory
functions were the Patent and Trademark
Office (1836), the Copyright Office (1870),
and the Bureau of fisheries (1871), and the
Comptroller of the Currency (1863).
Two Supreme Court decisions in 1819
confirmed the supremacy of federal law
over state law and laid more groundwork for
extensive federal regulation in later eras.
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Waves of Growth: Wave 2

In 1887 Congress built the prototype of the
modern federal regulatory authority when it
created the Interstate Commerce Commission
(ICC) to regulate railroads.
It was an independent regulatory commission
In 1914 the Federal Trade Commission (FTC)
was established in response to the large,
dominant trusts in many industries.
By the early 1930s there were seven more
new federal agencies and commissions
regulating business.
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Waves of Growth: Wave 3

To deal with the economic catastrophe of the Great
Depression, President Roosevelt proposed the New Deal a
series of programs to bring Relief, Recovery, and Reform.
The new laws were quickly challenged in the courts and the
Supreme Court, in a unanimous decision, declared the
National Industrial Recovery Act to be unconstitutional.
Outraged and frustrated, Roosevelt sent Congress a plan to
change the Court by appointing one new justice for every
justice over age 70 who didnt retire.
The plan would die in Congress, but had its intended
effect.

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Waves of Growth: Wave 4

In the late1960s and early 1970s a groundswell of interest in
improving the quality of life resulted in new controls designed
to achieve broad social objectives.
Several new independent commission were created including
the Equal Employment Opportunity Commission (1964), the
Consumer Product Safety Commission (1972), and the
Nuclear Regulatory Commission (1974).
Most of the new agencies were executive agencies.
The buildup of regulations to achieve social objectives
existed simultaneously with a deregulation movement that
focused on removing or streamlining older economic
regulations.

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War Blips
Civil War there was limited control over
production and prices, but the North created the
National Banking System to help finance the war.
World War I introduction of substantial controls
over industry, but the war ended before the controls
began to bite.
World War II and to a lesser extent the Korean
War wartime controls were completely
abandoned.
Vietnam War and wars in the Middle East no
comparable increase in regulation.
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How Government Regulations

are Made
All federal regulation originates in an act of
Congress.
A bill is a proposed piece of legislation placed
before the Congress for its approval.
When a bill is passed by both houses of Congress
and signed by the president its provisions become
law.
It is then the responsibility of the appropriate
regulatory agency to create the specific regulations
(rules) needed to implement the provisions of the
bill (rule making).
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Regulatory Agencies and All

Three Branches of Government
Influence Regulations
Regulatory agencies create the regulatory rules. A rule is a
decree developed by an agency to implement a law passed
by Congress.
Presidents have used many devices to limit and direct
regulation including executive orders, favorable appointments
of agency administrators, and central review of regulations in
the White House.
Congress approves presidential nominees as head regulators
and approves agency budgets.
Federal courts have the power to hold unlawful agency
actions that are arbitrary, capricious, unconstitutional, in
excess of agency jurisdiction, or unsupported by evidence.

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The Regulatory Burden

Total dollar costs of regulation were $843
billion in the year 2000 (8.6 percent of the
total GDP) and rose to $1.1 trillion in the
year 2004 (11 percent of total GDP).
Small businesses bear a disproportionately
large share of the federal regulatory
burden.
Other costs of regulation also large but are
indirect and much more difficult to quantify.

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Administrative Costs of
Regulation

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Benefits of
Government Regulation
Regulation has helped to:

Improve the position of minorities

Clean the environment
Prevent monopoly
Reinforce free competition
Prevent corruption
Strengthen the banking system
Reduce industrial accidents
Provide resources for the elderly
Control communicable diseases

These benefits are enormous and incalculable

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Regulation in Other Nations

The World Bank conducted a study to
catalog, classify, compare, and evaluate
regulations in every nation. Four basic
findings were:
Regulation varies widely around the world.
Poor countries regulate business the most.
Rich countries regulate business in a consistent
manner while poor countries do not.
Developed countries engage in continuous
regulatory reform while there is thus reform in
developing countries.
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Principles of Good
Regulation
1. Simplify and deregulate in
competitive markets.
2. Focus on enhancing property rights.
3. Expand the use of technology.
4. Reduce court involvement in
business matters.
5. Make reform a continuous process.

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Concluding Observations
There have been ups and downs in the trend of
regulations, but the basic direction has been up,
with respect to both total volume and complexity.
Successive efforts of presidents have not
succeeded in slowing the expansion of regulation,
but have produced needed reforms.
The cost of federal regulations is huge, but the cost
is offset in significant degree by the many benefits
of regulation to society as a whole, individuals,
companies, and industries.

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