Authors libby rittenberg 867

The Public Interest Theory of Regulation
The public interest theory of regulation holds that regulators seek to find
market solutions that are economically efficient. It argues that the market
power of firms in imperfectly competitive markets must be controlled. In
the case of natural monopolies (discussed in an earlier chapter), regulation
is viewed as necessary to lower prices and increase output. In the case of
oligopolistic industries, regulation is often advocated to prevent cutthroat
competition.
The public interest theory of regulation also holds that firms may have to
be regulated in order to guarantee the availability of certain goods and
services—such as electricity, medical facilities, and telephone service—
that otherwise would not be profitable enough to induce unregulated firms
to provide them in a given community. Firms providing such goods and
services are often granted licenses and franchises that prevent
competition. The regulatory authority allows the firm to set prices above
average cost in the protected market in order to cover losses in the target
community. In this way, the firms are allowed to earn, indeed are
guaranteed, a reasonable rate of return overall.
Proponents of the public interest theory also justify regulation of firms by
pointing to externalities, such as pollution, that are not taken into
consideration when unregulated firms make their decisions. As we have
seen, in the absence of property rights that force the firms to consider all of
the costs and benefits of their decisions, the market may fail to allocate
resources efficiently.

Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org

867