July 21, 2024 

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ABSTRACTION METHODS: Abstraction is the process of simplifying the complexities of the real world by ignoring (hopefully) unimportant details, especially (for our purposes) while doing economic analysis. Three common methods of actual, real world abstraction used in economic theories are words, graphs, and equations. Words can be misunderstood. Graphs are a little more precise. And equations tend to be the most precise of the three.

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Laying The Groundrules On REGULATION

Our journey has brought us to the "Rs," which means, among other things, that my feet are trifle bit sore. Fortunately, we've also found ourselves at the front door of the Good Time Pharmacy. (Isn't coincidence wonderful?) My quick shopping trip for a pair of cushioned insoles, analgesic rub, and an ankle wrap is lengthened, however, by crossing paths with the normally quiet Stella von Steincamp. Stella, the pharmacist and proprietor of the Good Time Pharmacy, has taken the opportunity of our meeting to voice a rather vehement complaint over a new Shady Valley city government pharmaceutical regulation mandating the use of disposable rubber gloves when preparing and dispensing medicine. She is livid! Her primary complaint (among several) is that the cost of this regulation will send her pharmacy onto a short path into bankruptcy. In the interest of maintaining pharmaceutical services for the residents of Shady Valley, I think, would should explore this topic of government regulation.

The Regulatory Groundrules

One of the best reasons to keep our evil first estate necessity around is to provide stability in what could be a rather haphazard existence. Government does this by imposing all manner of laws, rules, and restrictions upon our lives. Some of these rules -- like the one about not killing each other -- probably make sense, while others are annoying or even downright ludicrous. Although we can nit-pick about this one or that one, without the rules governing civilized behavior we wouldn't have, well, civilized behavior. We would be pack of barbarians where anarchy is the rule of the day -- everyday. Without such rules of civilized behavior, as we saw with Fact 2, we would have little success producing and exchanging the stuff that satisfies our wants and needs.

This is the screen upon which government regulation of our economy is projected. When pointy-headed economists, business leaders, and government leaders (our favorite) talk about regulation they're referring to the rules, laws, and restrictions that have a direct bearing on second estate production, third estate consumption, and exchanges between the two estates.

We can put most of the regulations we have into one of two categories:

  • Industry. These are regulations that control production, pricing, and an assortment of other practices, in an entire industry. Some of the better known industries subject to this regulation are the telephone, banking, and electric utilities. The logic behind industry regulation is that production technology is such that a small number of companies, often only one, tend to acquire excessive market control. To prevent the unavoidable tendency to play monopoly and abuse their control, government becomes an active partner in the process, dictating what business can and can not do. At one time we had a lot more industry regulation in the good old U. S. of A., but much of it was given "walking papers" in the 1980s under a wave of deregulation. We'll see why in a few pages.

  • Social. A more popular form of regulation in recent decades has been aimed at correcting the social ills that any complex economy is likely to create. Examples of these include, but are not limited to, pollution, the lack of information, and a myriad of costs or benefits that tend to be outside the normal demand and supply decisions of our markets. As such, social regulations usually extend beyond the confines of a single industry.

Industry and social regulations are really no different from other laws governing civilized behavior. We have a law that says it's wrong to kill another person by shooting them with a gun, presumably because we want to protect the rights of the victim. We also have laws that prevent businesses from dumping death-inflicting, toxic chemicals into our streams for presumably similar reasons. There seems little room for debate.

However, when someone (like a business) has been polluting a stream for a generation or two, they think of it as their "right" to do so. If you, I, or the government tries to take that "right" away, then we're in for a big battle. In that you have made it all of the way to the "Rs," you're probably aware that the second estate has the wealth and power needed to put up a good fight when it comes to something like regulations.

Some Regulatory Tools of the Trade

Let's ponder some of the more popular methods that government uses to regulate our economy:

  • Laws and restrictions. The most straightforward way to regulate anything is to pass a law or impose some form of rule or restriction. It can be declared illegal -- subject to punishment -- to buy this, sell that, produce a good, possess a good, or whatever. Our government has used this for things like plutonium, certain pesticides (DDT), narcotics (cocaine), and other stuff that we probably don't even know about because they've been banned from our economy.

  • Standards. Another favorite regulatory tool is to set a standard or rigid guideline. For example, automobiles have to meet pollution emission standards and physicians have to pass certain proficiency exams for licenses to practice their trade.

  • Taxes. The favorite regulatory tool of most pointy-headed economists is taxes, especially for things like pollution. This works best when there's a cost that's beyond the market. A tax forces the market, especially the producer, to make any supply decisions as if they were paying those extra costs, because they are -- as taxes.

  • Information. One of the simplest and more effective tools for regulating the economy is to ensure people have necessary information. At this point in our pedestrian journey you're probably well aware that information plays a big role in a lot of stuff. Part of the harm inflicted on some (third estate) by others (second estate) is often the result of inadequate information. Making better information available can clean up a number of problems.
The Politics of Regulation

When we get into any sort of government policy, we can't avoid the diverging interests of the second and third estate. Nowhere is this more true than regulation. As we've seen a number of times, the second estate tends to have more wealth and power than the third. A main reason for government is to protect the hardworking consumers and taxpayers of the third estate against the nefarious doings of the second estate. However (there always seems to be a "however"), while the first estate government leaders might side with the third estate at times, it's also inclined to walk arm and arm with the second estate.

In this latter case, some very good regulations can be turned on their head, creating worse problems than they sought to solve. The best example lies with industry regulation.

When the Inmates Take Over

Let's visit our good monopoly friends at Merciless Monolithic Media Masters Cable Television. As we saw with Fact 4, if left unrestricted, they have a strong, very strong, inclination to charge high prices and provide bad service. You, me, and every other pedestrian consumer of Shady Valley has little recourse. We either buy their services or we don't. There's no competition. A situation that is (hopefully) corrected by government action.

Let's say that the responsive government of Shady Valley sets up a regulatory board to oversee the pricing and production decisions of the 4M people. If the cable company wants to charge higher prices, the board has to give their approval. Likewise, the board can impose rules on the timeliness of service calls, provision of services to all potential customers, and the quality of the signal. The board is also likely to guarantee the cable company receives some profit for it's efforts. The profit won't be as high as the unregulated profit, but enough to keep it operating. This seems like a fair way to handle things.

Here's where the politics of wealth and power enter the picture. The 4M company has a lot to gain from favorable decisions by the Shady Valley regulatory board -- gadzillions is an amount that comes to mind. The cable company will do it's best to gain control of the Shady Valley regulatory board, in legal or illegal ways. You can imagine some of the illegal stuff, but a common legal method pops up when former (and likely future) employees of the company serve on the regulatory board. After all, who knows more about regulating a cable company that someone who once worked for a cable company? This all-to-common practice, by the way, is usually referred to as the "rotating door" of regulatory agencies.

The result is a regulatory board that serves as an extension of the company it's regulating. The members of the regulatory board don't protect the customers interests at much as they protect the company -- and their own future careers. This has been, and probably will continue to be, a common practice for industry regulation. It was also prompted deregulation of a number of industries, like airlines, trucking, and railroads, in the 1980s.

Going to Extremes

First estate control, however, can go both ways. Excessive influence by the second estate can not only affect industry regulation, it can also sway the government against consumer-protecting social regulation. Excessive influence by the third estate on the government can also create problems. How is this possible?

The overworked, underappreciated members of the third estate can be overprotected, as well. Regulation can cause too many of our economy's resources to be spent cleaning the environment or making defective free products. It's nice to have a clean environment, but at what price? Would we be willing to give up our jobs, incomes, and material possessions for a pollution-free world? Probably not.

The trick is to strike a balance between the benefit of regulation and its cost. Some regulations are extremely beneficial, and cost very little. Others tip the scales in the opposite direction. It would be convenient if we could clearly determine which is which, but we can't. One reason is that the cost of a given regulation is often obvious, and well documented by shrieking business leaders who pay them. The benefit from a regulation, however, tends to be pretty nebulous. What is the benefit of eliminating roadside trash?

Because the cost of regulation is usually known and the benefit isn't, doesn't necessarily mean benefit outweighs cost. It may or may not. We usually don't know which way it goes. Our only real hope is that people tend to scream loudly when the cost and benefit gets too far out of balance.

With this sobering thought, let's have a regulatory tip:

A Regulatory Tip

  • Whenever the topic of regulation is broached, you have to consider the source of alternative viewpoints. Consumers tend to favor regulations and businesses oppose them. Carefully weigh the eloquent rhetoric that you're likely to hear from both sides. Keep in mind that the second estate tends to have wealth, power, and information control on their side. As such, I'm usually inclined to favor the arguments given on behalf of the underappreciated and often less powerful members of the third estate. But, that's my personal bias.

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