Regulation

HISTORICAL PERSPECTIVE

THEORETICAL UNDERPINNINGS

IMPLEMENTATION AND BENEFITS

BIBLIOGRAPHY

Regulation involves attempts by the government to monitor and correct any disorders in the workings of free markets. Formally, economic regulation refers to all types of taxes and subsidies as well as to governmental controls over prices, market entry, and other aspects of economic activity. Some regulation might directly impose monetary costs (e.g., taxes or fines on noncompliers), while other types of regulation might impose costs indirectly by mandating standards that might be costly to adhere to. Examples of regulation include limits on emissions from vehicles, fire-retardant materials used in children’s bedding, airline safety standards, smoking bans, food safety, and consumer protection laws.

While the extent of government intervention in economic activity remains a matter of heated debate, few individuals would argue for a complete absence of regulation. Two widely accepted issues deserving of regulation might be related to a country’s monetary system (smooth working of the banking system and the money supply) and national defense. These attempts might be focused on both buyers and sellers, or might be directed at one of the parties. Banking laws are examples of laws that affect both buyers and sellers, while regulations by the Occupational Safety and Health Administration (OSHA) can be viewed as aimed directly at sellers. The disorders or imperfections that regulation seeks to rectify might be related to prices (too high prices), quantity or service (not all customers being served), reliability (failure to adhere to schedules), and fairness, among other issues. In practice, common instances of regulation include promotion of competition, safeguarding the interests of buyers or sellers (or both), protecting the environment, and defending national interests. For instance, the Clayton Act and the Sherman Act are two primary laws in the United States that deal with provision of fair market competition.

HISTORICAL PERSPECTIVE

Historically speaking, regulations have changed over time with new technologies, new concerns, and new revelations (e.g., harmful environmental effects of certain known substances). Sometimes, however, certain unexpected events bring about a flurry of regulations (or deregulations) in a rather short period of time. Examples of such events include the Great Depression, the 1973 oil embargo, and certain natural calamities. The Great Depression prompted governments to better regulate their economies so they could prevent wide and sudden variations in the unemployment and inflation rates. In the United States, the Federal Reserve System, which governs the money supply and oversees the banking system, was a direct offshoot of the Great Depression. The oil embargo led to various regulations regarding oil conservation including provisions for minimum fuel efficiency on automobiles. Further, natural disasters such as hurricanes and earthquakes can lead to tougher building codes in vulnerable areas.

Governments generally set up regulatory agencies to impose and monitor regulations. These agencies usually have semi-autonomous status to keep them relatively free of political pressures, although in a number of instances the regulated agencies end up enforcing the regulations passed by the executive branch. These agencies might be national (Federal Communications Commission), or they may be sub-national (Illinois Commerce Commission). In some instances, cross-national organizations such as the World Bank and United Nations impose codes of conduct across nations. However, such regulations generally are difficult to enforce and are usually less effective.

THEORETICAL UNDERPINNINGS

The theoretical underpinnings of regulation may be understood in the context of the three widely cited theories of regulation: (1) public interest theory; (2) capture theory; and (3) economic theory of regulation. According to the public interest theory, regulation is supplied or enacted by governments to correct inefficient and/or unfair market practices or outcomes. However, this theory implicitly assumes that regulators have the capacity and the willpower to determine what is fair and efficient. Since the late twentieth century, the public interest theory has been somewhat revised to recognize that regulatory agencies themselves might be inefficient. It is also unclear from this theory how public interest matters take the form of legislation. The capture theory of regulation can be seen as drawing from both economics and political science. According to this theory, regulatory agencies over time tend to be dominated or influenced by the industries they regulate. In other words, the integrity of the regulatory agencies tends to be compromised by their clientele. This theory, however, ignores special interest groups other than the regulated industries (e.g., consumers). The economic theory of regulation is primarily due to the work of the scholar George Stigler. This theory suggests that the economic laws of demand and supply can be employed to understand regulation. Alternately stated, the optimal amount of regulation would balance the demand and supply of government intervention. The demanders of regulation may be viewed as special interest groups (consumers) or parties being harmed by the current state of affairs (businesses unable to compete in protected markets). The suppliers of regulation are the regulatory agencies. This theory also recognizes that in the real world enactment of rules and regulations is not based purely on economic considerations. Rather, they are enacted in a political-economic context. The use of the laws of demand and supply enables efficiency in the provision of regulation. However, the economic theory of regulation has not been refined to the point where it enables us to predict specific industries in which regulation will be found.

IMPLEMENTATION AND BENEFITS

In imposing various types of regulation, regulators should be mindful of equity or fairness aspects on the one hand and efficiency or wastage considerations on the other hand. Generally, there is a tradeoff between the two criteria. For instance, some regulatory intervention that is relatively equitable (e.g., minimum wage laws providing a “fair” wage to unskilled or less-skilled workers) is usually not efficient (i.e., minimum wage laws do not allow the markets to work efficiently and impose undue hardships on some businesses). Thus, regulators have to weigh relative pros and cons of intervention and impose the socially optimal level of regulation. The socially optimal level would generally be less than total regulation (e.g., there should be a socially desirable level of pollution; getting rid of all pollution would impose undue costs on the society in terms of sacrifices to be made, such as no electricity generated via nuclear or thermal power plants and no polluting vehicles).

The main benefit of regulation is that it corrects shortcomings in the workings of markets. Some benefits of regulation, however, might be diffused over time, while the costs might be upfront. In such cases, it becomes difficult for regulators to convince the affected parties of the desirability of regulation. An example of this may be environmental regulation. Regulations mandating the cleanup of toxic waste dumps impose costs up front but their benefits in terms of improvement in the environment and related health benefits would only be realized over time.

The costs of regulation include the costs of compliance and the costs of monitoring. Sometimes the monitoring costs can turn out to be very high with the result that in certain instances products might either not be regulated or not be regulated effectively. Other times there are unexpected consequences of regulation when markets are connected or are interdependent. For instance, tougher regulation ensuring the purity of the milk supply would affect the milk industry directly, but also related industries that make use of dairy products (restaurants, cheese, coffee, and ice cream, for example).

Price regulation might impose direct price controls on products (price cap regulation), or it might control prices indirectly (via rate of return regulation where regulated firms are free to set prices, provided they do not earn above a specified rate of return on capital). Price cap regulation can affect the regulated firm’s investments in research and development, while it has been shown that the rate of return regulation leads to overcapitalization (i.e., regulated firms would use more capital than they would in the absence of such regulation). Thus, one type of regulation does not seem suitable for all cases.

Sometimes regulation is uncertain and not all types of intervention are predictable. Such uncertainty might plague both suppliers of regulation (i.e., government) and the parties affected by regulation. Governments might not know a priori whether they would have to regulate a new technology (new supersonic airplane) because of some future undesirable side effects (new airplane too noisy for residential areas). The public is uncertain whether and when current or future products might face additional regulations. A case in point is the impending threat of restrictions on cell phone usage while driving.

In practice, even after regulators have determined that certain products or industries need to be regulated, there is generally a time delay (called a regulatory lag) between the realization of the need for intervention, the enactment of relevant laws and their implementation. This reduces the effectiveness of regulatory intervention as it affords the affected parties time to find ways to circumvent the regulations. In certain cases, the regulatory lag might be long enough to make rules unnecessary when they are finally put into place.

In conclusion, regulation seems essential in many instances. One could differ in one’s perceptions about the scope of regulation, but its desirability in many instances seems real. Over time government intervention needs to be dynamic to be efficient and effective. Certain industries might not need regulations over time, while new regulatory instruments might have to be developed in other instances, such as in the regulation of the Internet.

SEE ALSO Antitrust; Antitrust Regulation; Deregulation; Privatization

BIBLIOGRAPHY

Kahn, Alfred E. 1971. The Economics of Regulation: Principles and Institutions. 2 vols. New York: Wiley.

Peltzman, Sam. 1967. Toward a More General Theory of Regulation. Journal of Law and Economics 19: 211-240.

Posner, Richard. 1974. Theories of Economic Regulation. Bell Journal of Economics 5: 335-358.

Stigler, George J. 1971. The Theory of Economic Regulation. Bell Journal of Economics 2: 3-21.

Rajeev K. Goel

Regulation

Commercial space activities conducted by U.S. companies are regulated by the federal government in four major areas: space launches, remote sensing , communications, and limitation of the transfer of technology for reasons of national security and industrial policy.

Communications are regulated by the Federal Communications Commission (FCC). The FCC was established in the 1930s to regulate radio (and later television) and the use of spectrum, assuring that the signals from one station would not interfere with those from another station. When commercial communications satellites arrived in the mid-1960s, the FCC had had three decades of regulatory experience.

The office within the FCC that issues licenses for satellites is the Satellite and Radiocommunications Division of the International Bureau. Licensing assures that any proposed new satellite will not interfere with other satellites or with any other operating radio applications, on Earth or in space. All commercial launches, reentries, or landings conducted by U.S. companies are regulated by the Commercial Space Launch Act (CSLA). Under the CSLA, each launch or reentry must have a license. FAA/AST, the Office of Commercial Space Transportation, is part of the Federal Aviation Administration and is the federal government agency that issues these licenses. Its web site (ast.faa.gov) contains all the relevant rules, laws, regulations, and documents needed to obtain a launch license. FAA/AST conducts a policy review, a payload review, a safety evaluation, an environmental review, and a financial responsibility determination based on the data in the license application before issuing or refusing a license. The purpose of a launch license is to assure that "the public health and safety, safety of property, and the national security and foreign policy interests of the United States" are properly considered.

Commercial remote sensing from space is regulated under the 1992 Remote Sensing Policy Act and its associated regulations and administration policies. The act directs the secretary of commerce to administer its provisions, and those duties have been delegated to the National Environmental Satellite, Data, and Information Service (NESDIS) of the National Oceanic and Atmospheric Administration (NOAA), an agency of the Department of Commerce. NESDIS runs the nation's weather satellites, and the International and Interagency Affairs Office (IIAO) within NESDIS issues the licenses needed to operate private space-based remote sensing systems (www.licensing.noaa.gov/).

NESDIS/IIAO reviews these applications in consultation with the Department of Defense (national security), the Department of State (foreign policy), and the Department of the Interior (which has an interest in archiving remote sensing data). Once an application has been determined by NESDIS/IIAO to be complete (all the required documents and data have been submitted), by law NOAA has to issue an up-or-down license determination within 120 days. Documents, background data, instructions, and examples are available at NESDIS/IIAO's web site to aid license seekers.

Under the law, a licensee must operate its space-based remote sensing system(s) so that the national security interests of the United States are respected and the international obligations of the nation are observed. A licensee must maintain positive control of its system(s) and maintain clear records of the sensing those systems have done. A U.S. licensee also must agree to "limit imaging during periods when national security or international obligations and/or foreign policies may be compromised." This is called "shutter control": The federal government can, in time of international stress (war or conflict) tell licensees what they can and cannot take pictures of.

The major law in the area of trade control is the Arms Export Control Act (AECA) and its associated regulations, the International Traffic in Arms Regulations (ITAR). Virtually anything involving space falls under ITAR. Equipment for ground stations for satellite control; transmitters; rocket engines; computer software for controlling a rocket, a satellite, or a ground station; rockets; and satellites are all subject to control and licensure under ITAR.

Licenses and regulation under the AECA and ITAR are administered by the U.S. Department of State and its Office of Defense Trade Controls (DTC), which is part of the Bureau of Political Military Affairs. These organizations are aided in their work by the Defense Threat Reduction Agency of the Department of Defense. DTC's web site (www.pmdtc.org) contains documents, background data, and instructions to aid license seekers, including electronic means for the filing and tracking of license applications.

The United States is a party to the Missile Technology Control Regime (MTCR), to which twenty-eight other countries, including Russia, Greece, Hungry, and Spain, also belong. Equipment and technology are controlled under this regime to limit the proliferation of weapons of mass destruction through efforts to control the availability of delivery systems (rockets). The State Department and the Department of Defense attempt to assure that space companies that export services or products adhere to the goals of the MTCR.

During most of the 1990s, space-related trade control was the responsibility of the Department of Commerce, specifically the Bureau of Export Administration (www.bxa.doc.gov) and the International Trade Administration (www.ita.doc.gov). Both of these agencies now play a reduced role in regulating the export of space-related trade products and services, but their main role at present is primarily to support the activities of the Department of State.

The shift of the regulation and licensing of space-related trade from the Department of Commerce to the Department of State resulted from a law passed by Congress, which wanted to eliminate what it felt was a looseness in U.S. trade control that had led to the transfer of sensitive space technology. This statutory change had unintended consequences, making it extremely difficult for a company such as Orbital Sciences Corporation to communicate with a division of its own company based in a foreign country. Under this regime, satellite engineers cannot talk to their counterparts in the United Kingdom without a license. These restrictions became so stringent that Orbital sold its Canadian-based division because of the difficulties presented by these mandated trade restrictions. Congress has since passed new legislation to address this problem.

see also Law (volume 4); Law of Space (volume 1); Legislative Environment (volume 1); Licensing (volume 1).

Timothy B. Kyger

Internet Resources

Office of Commercial Space Transportation. Federal Aviation Administration.<http://ast.faa.gov>.

Satellite and Radiocommunications Division of the International Bureau. Federal Communications Commission. <http://www.fcc.gov/ib/srd>.

REGULATION

A rule of order having the force of law, prescribed by a superior or competent authority, relating to the actions of those under the authority's control.

Regulations are issued by various federal government departments and agencies to carry out the intent of legislation enacted by Congress. Administrative agencies, often called "the bureaucracy," perform a number of different government functions, including rule making. The rules issued by these agencies are called regulations and are designed to guide the activity of those regulated by the agency and also the activity of the agency's employees. Regulations also function to ensure uniform application of the law.

Administrative agencies began as part of the executive branch of government and were designed to carry out the law and the president's policies. Congress, however, retains primary control over the organization of the bureaucracy, including the power to create and eliminate agencies and confirm presidential nominations for staffing the agencies. Congress has also created administrative agencies that exist outside of the executive branch and are independent of presidential control. President franklin d. roosevelt and the new deal plan he implemented created many new administrative agencies. Over the years administrative agencies have become more powerful participants in the overall federal government structure as Congress and the president have delegated more legislative and executive duties to them. Administrative agencies have also become responsible for many judicial functions.

The judicial and legislative functions of administrative agencies are not exactly like those of the courts or the legislature, but they are similar. Because regulations are not the work of the legislature, they do not have the effect of law in theory; but in practice, regulations can have an important effect in determining the outcome of cases involving regulatory activity. Much of the legislative power vested in administrative agencies comes from the fact that Congress can only go so far in enacting legislation or establishing guidelines for the agencies to follow. Language that is intrinsically vague and cannot speak for every factual situation to which it is applied, as well as political factors, dictate that the agencies have much to interpret and decide in enforcing legislation. For example, securities laws prohibit insiders from profiting against the public interest, but it is left to the applicable administrative agency, the securities and exchange commission, to define "public interest." The food and drug administration, another administrative agency, must keep unsafe food and ineffective drug products off the market, but further administrative refinement and interpretation is necessary for the agency to determine what products are "unsafe" or "ineffective." The federal communications commission must interpret laws regulating broadcasting; the treasury department issues regulations interpreting the internal revenue code; and the Board of Governors of the federal reserve System issues regulations governing the actions of Federal Reserve banks. The many other administrative agencies and departments make regulations to provide clarity and guidance in their respective areas of the law.

Administrative agencies carry out legislation in several ways, including enacting regulations to carry out what the agency believes is the legislative intent. Agencies generally formulate proposed regulations and then open up rule-making proceedings in which interested parties can testify and comment on them. The agency then issues a rule or policy that binds the agency in future cases just as statutory law does.

The administrative procedure act of 1946, 5 U.S.C.A. § 551 et seq., with its subsequent amendments, was designed to make administrative agencies accountable for their rule making and other government functions. It imposed a number of procedural requirements designed to make procedures among agencies more uniform. In administrative rule-making proceedings formal hearings must be held, interested parties must be given the opportunity to comment on proposed rules, and the adopted formal rules must be published in the Federal Register. After being published in the Federal Register, the regulations are subsequently arranged by subject in the Code of Federal Regulations. The Administrative Procedure Act has been criticized, however, because it contains a number of exemptions that allow the agencies discretion in whether or not they strictly adhere to the guidelines established in the act. Organizations such as the american bar association are working toward eliminating such discretion in administrative agencies.

further readings

Janosik, Robert J., ed. 1987. Encyclopedia of the American Judicial System. Vol. II. New York: Scribner.

cross-references

Administrative Agency; Administrative Law and Procedure; Code of Federal Regulations; Federal Register; Public Administrative Bodies; Quasi-Legislative.

REGULATION

The regulation of industries in the United States is based largely on a concern for the public interest. Industries, especially those with a high potential for monopoly (such as water, gas, and telephone service), will often be regulated by agencies of government for the benefit of the public, so that consumers can be assured of quality services and products at reasonable rates. The rationale for the regulation of all or part of an industry is that if a monopoly exists, and competition is inappropriate, then monopolies should be regulated to avoid possible abuses of uncontrolled monopoly power. Regulation is a public sector (government) guarantee that consumers should benefit from the built-in economies of any monopoly. Regulators seek to establish customer rates that cover production costs and yield a "fair" or "reasonable" return to the enterprise.

There are problems associated with the regulation of business by the public sector. First, a regulated firm may resort to accounting manipulation to overstate its costs to obtain higher unjustified profits. Second, some regulatory commissions of the government function inadequately, sometimes even making "deals" with the industries they are regulating. Third, it is often uncertain which industries should be regulated. The trucking and airline industries both claim that if they were less regulated, they would be more competitive. In addition to the regulation of near monopoly industries and natural monopolies (like water and electricity), since the early 1960s, the public sector also regulates the conditions under which goods and services are produced, as well as the impact of production on society, and the physical quality of goods. This kind of social regulation is applied across the board to virtually all industries. Examples of social regulation includes the efforts of the Occupational Safety and Health Administration (OSHA), which regulates industries to protect workers against occupational injuries and illnesses, and the efforts of the Consumer Products Safety Commission (CPSC) which regulates minimum standards for potentially unsafe products. Though regulation itself can be controversial, few question whether it should exist. The primary question that any public sector regulation imposes is how and when it should be used.

See also: Monopolies, Monopoly

regulation (in embryology) The processes involved in animal embryonic development that counteract any abnormalities that may arise in the different developmental stages. Regulative (or regulation) embryos or eggs can compensate for the removal of sections of the embryo or egg at an early stage of development so that subsequent development is not affected; in such embryos the direction of development of the cells is not determined until cleavage is well advanced. Regulation also includes twinning: the formation of two embryos from the cleavage of a single embryo (see twins).

reg·u·la·tion / ˌreg(y)əˈlāshən/ • n. 1. a rule or directive made and maintained by an authority: planning regulations. ∎  [as adj.] in accordance with regulations; of the correct type: regulation army footwear. ∎  [as adj.] inf. of a familiar or predictable type; formulaic; standardized: a regulation Western parody. 2. the action or process of regulating or being regulated: the regulation of financial markets.