In its broadest and most usual sense, regulation is any attempt by government to modify the behaviour of businesses. Most typically it refers to formal rules created by government bodies under the authority of legislation. Some regulations limit what businesses can do (as is the case with regulations that establish a minimum wage). Other regulations require specific behaviours (as is the case with labelling regulations that require food manufacturers to list a food’s basic nutritional characteristics).
Many people assume a simplistic view according to which government’s job is to create and enforce regulations, and the role of companies is to moderate their behaviour accordingly. In practice, the regulatory process is more complicated. In some cases, businesses lobby government to create, modify, or eliminate regulations. In other cases, governments delegate regulatory authority to, or seek regulatory guidance from, an industry body or professional association. In still other cases, a group of businesses in an industry may bypass government entirely, banding together to create their own sets of rules and to enforce them upon themselves in what is known as “self-regulation.”
Individual regulations are created for many different purposes. Some are created to protect consumers. Others are created to limit the unintended side-effects of commercial activity (such as pollution) on bystanders or on communities as a whole. On one view, the main goal of regulation in general should be to attempt to make markets operate more efficiently, and closer to the way that the “ideal” markets described in economics classrooms do.
The extent to which government should regulate business activities is controversial. Most people recognize the need for at least some regulation, but many worry that regulation can easily become excessive. The costs of compliance with existing regulations and keeping up with updated or additional regulations may exceed the social benefits derived from them. Established companies can sometimes manipulate the government regulatory structure to create regulations that look on the surface like public safety or environmental protection measures, but whose main function is to insulate the established companies from competition by upstarts because the regulations raise their competitors’ costs. Thus, both the ideal content and quantity of regulation is an important ethical and economic topic.
See also in CEBE:
- David Moss and John Cisternino, eds., New Perspectives on Regulation, Tobin Project, 2009.