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Print The capture theory of regulation, popularized in an article by Nobel laureate George Stigler, concludes that regulatory agencies become “captured” by the firms they regulate. Regulatory agencies act in the best interest of the firms they regulate rather than serving the general public interest.
Regulatory capture partly occurs because regulated firms have a concentrated interest in regulatory outcomes. In contrast, the general public has a diluted interest. Regulated firms have a large incentive to influence regulatory agencies. Most members of the general public have almost no incentive to do so.
Assume, for example, that a regulatory protection for a firm would cost each of one million customers of that firm $5, which would then be transferred to the firm. Individuals have little incentive to mount any opposition to that $5 cost they bear, whereas the firm would stand to gain $5 million from the regulation. The firm will lobby hard for the regulatory protection, whereas most consumers probably will be unaware that the regulation even exists.
A good real-world example is the mandate that motor fuels include ethanol. There is little consumer backlash against this, even though we know consumers would prefer motor fuels without ethanol. (Otherwise, there would be no reason to mandate it.) Meanwhile, corn farmers and processors reap an enormous benefit from the mandate in exchange for a small cost imposed on many consumers.
Regulated firms have other advantages too. A big one is that information which the regulatory agency uses to regulate the firm comes directly from the firm, so the firm can control that flow of information to its advantage. Another advantage is that regulators and the regulated are likely to know each other personally and want to remain on good terms with their friends.
The title of this post is also the title of an article I […]
We Often Feel Like David Taking on Giants
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