Why do governments intervene in private markets? Why do governments regulate?

1

• Why do governments intervene in private markets?
  Why do governments regulate?
• Imagine no property rights, criminal law, tort
  law, contract law
• Imagine only property rights, criminal law, tort
  law, contract law

Security ? Criminal/tort law, Encourage
investment Contract law Encourage
innovation Property rights / IP Encourage
gains from trade
2

• Terminology
• Pareto optimality (vs. alternatives)

3

• Market Failure I Misuse of Economic Power
• Control of monopoly power
• Unfair competition law
• History

4

• Market failure II Natural Monopoly
• Economies of scale
• Network effects
• Bottleneck industries
• Response?

• Public ownership vs. Price / service regulation
• What does price / service regulation mean?

5

• Market Failure III information asymmetries
• Economic theory ? in order to have efficient
  markets, all participants need reliable
  information
• E.g., Securities, consumer products

6

• Market Failure IV Providing/maintaining Public
  Goods
• What are public goods? What distinguishes public
  goods from other goods?

7

• Market Failure IV Providing/maintaining Public
  Goods
• What are public goods? What distinguishes public
  goods from other goods?
• Free to use
• Nonrival consumption
• Tragedy of the commons

8
    PRISONER'S DILEMMA Whether to testify against
his partner in crime (defect), or to
cooperate with his fellow prisoner by remaining
silent.     Prisoner A   Cooperate Defec
t   Prisoner B Cooperate -2, -2 -10,
-0     Defect -0, -10 -6, -6 
9
    PRISONER'S DILEMMA Cardinally valued
outcomes 4best 1worst     COLUMN   Co
operate Defect   ROW Cooperate 3,
3 1, 4     Defect 4, 1 2,
2 
10

• Playing the PD game
• No communication between players
• First game 10 rounds
• Second game unknown duration, 5-15 rounds

Is the PD a good metaphor for public goods
management, or other types of market failure, in
your view?
11
Is the PD a good metaphor for public goods
management, or other types of market failure, in
your view?

• Rule against communication
• Repeat play issue
• Civil society vs. state of nature Contract law
• Leviathan Solution vs. property rights (Coase
  Theorem)

12

• History of Regulation
• Rise of economic power ? public ownership /
  regulatory commissions / competition law. These
  arose simultaneously in U.S. and elsewhere.
• Populism ?Progressive Era
• Latin American left-populism
• New Deal ? securities laws
• Post-WWII consumerism / environmentalism (60s and
  70s) U.S., Canada, Europe

13
Accumulation of Regulatory Statutes
Cumulative of laws
Progressive Era
1960s-70s
New Deal
Era of the robber barons
1800 1900 2000
14
Dangers of Regulatory Accumulation?

• Translating popular preferences into policy
  outcomes
• Ossification
• Moral hazard
• Wednesday Property rights and political risk
  federalism