Why less regulation isn’t necessarily better

From: Chicago Booth Review

The longstanding debate about government oversight is giving way to a new understanding of how to craft more effective industry rules



But in 1962, Stigler threw a wrench into this traditional way of thinking. In a groundbreaking paper on electricity prices, where the sellers were monopolies, he demonstrated that government regulation hadn’t lowered electricity prices as much as expected. If regulation didn’t work to bring prices toward marginal costs in a monopoly, what kind of effect was it having in other situations? Were government regulations at all effective in correcting private-market failures?

Stigler went on to introduce regulatory capture in a subsequent paper. (See “How George Stigler changed the analysis of regulation,” Winter 2015.) The theory, which earned him a Nobel Prize in Economic Sciences, suggests that regulators are captured and dominated by large, moneyed interests that can formally sway regulators to their favor. It prompted economists to approach regulation as they do other economic questions, dissecting regulations with models and empirical analysis, looking for actual effects and often not finding them to be as expected or promised.

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