Understanding Regulation Andrei Shleifer Whipple V. N. Jones Professor of Econom
ID: 382166 • Letter: U
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Understanding Regulation Andrei Shleifer Whipple V. N. Jones Professor of Economics, Harvard University email: ashleiferhar vard.edu 1. The Puzzle of Regulation The American and European societies are much richer today than they were 100 years ago, yet they are also vastly more regulated. Today, we live in houses and apartment buildings whose construction- from zoning, to use of materials, to fire codes - is heavily regulated. We eat food grown with heavily regulated fertilizers and hormones, processed in heavily regulated factories with publicly monitored technologies, and sold in heavily regulated outlets with elaborate labels and warnings. Our means of transport, including cars, buses, and airplanes, are made, sold, driven, and main tained under heavy government regulation. Our children attend schools that teach heavily regulated curriculae, visit doctors following heavily regulated procedures and paid government-controlled prices, and play on play-grounds using government-mandated safety standards. The extraordinary pervasiveness of government regulation in our lives raises a number of questions. Is regulation generally a good idea, as the positive correlation between its growth and the growth of income seems to indicate, or has it been an obstacle to economic and social progress? Have the USA and Western Europe grown in spite of it? How much regulation of a particular activity is appropriate? Does the nature of the activity being regulated, or the characteristics of a country influence the optimal choice? Is the level of regulation we observe in fact an outcome of efficient social choice, or are other factors as or more important? Over the twentieth century, economists have come up with a number of ways of thinking about government regulation. In this paper, I review some of the key theories of economic regulation, and assess their relevance, paying particular attention to the regulation of securities markets. The three theories I focus on are the welfare-theoretic or public interest theory of regulation associated with Pigou (1938), the contracting theory associated with Coase (1960), and the capture theory of Stigler (1971). I then describe an alternative way of thinking about regulation and social control of business more generally, developed in a series of papers with Simeon Djankov, Edward Glaeser, Rafael La Porta, and Florencio Lopez-de-Silanes. Finally, I use this theory to shed light on some differences in regulatory patterns around the world.Explanation / Answer
Open market
The concept of open market is free trade among buyers and sellers with out any restrictions such as taxes, tariffs , license and subsidies.
open market allows broad area of business which everyone can access it for example online market like walmart where people go to the site directly and purchase items on their wish and walmart delivers the ordered items to customer resedencies.
Advantages Of Open Market
In a open market sellers or producers made business according to local needs basing on different locations which means the needs of the people may vary from one place to the other.
Products cost will be at reasonable prices because in a free market the target of sellers were not permitted , tries to get more customers and offers the price on own decision.The price may be high basing on the demand of the product.
The supply and demand at open market free from government norms of doing business, The open market world allows innovation and development of products and services according to the suitable customers. No need to take permissions or certifications for business.
In open market the producers can distribute the business by using the available resources with no limitation.extending the global area need more requirement of raw material and man power. so the open market allow to have any quantity of raw material and man power according to the requirement to maximise the profits.
Disadvantages Of Open Market
Being it is open market , there will be less norms and certificationsn on quality of product. Basing on the own interest of the enterpreneur decides the quality of the product.
The process of making product may cause pollution and to control the pollution , no action can be taken because freedom of business
All the goods and services are not available particularly because all the goods and services are not profitable but necessary to the people.
Because of free market producers focus on more profitable business rather than needed. The government dont put rule to do such particular business which is needed by the people.
Freedom of business allows to have employees at lower pay rates. Mostly locallites attract to the business industries because of nearest job location and the payment for their work comparitively low because less restrictions from the government on employee needs.
Also in such business organisation skills of employees will not improve to move forward to other locations.
Closed Market
The concept of closed market puts agreement among the supplier and distributor where deals of the business with only one distributor or agent and the business is not open to any others.
Advantages
The closed market directs to less competition of the particular product or service. and constantly the demand increases for that product because of low availability.
Because of having one distributor the supplier of the product must maintain the quality and quantity because the business is totally under the control of distributor.If distributor not satisfied with the product design and quality , can cancel the agreement with supplier which is a big loss to the supplier.
Disadvantages
Being it is closed the business permitted to only few distributors the business area decreaces comparitively with open market .
Because of closed market to guarentee the product quality distributor need to have government certification and measure to get the more demand which the supplier or distributor need to spend money to have such quality people and material
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