An economic analysis of regulatory objectives and enforcement.
Degree GrantorUniversity of Canterbury
Degree NameDoctor of Philosophy
Theories of regulation are many. No single theory however explains the observed contrasts in regulatory behaviour and no clear criteria exist by which to identify a particular regulation as according to one theory or another. This is because there is no consistent theoretical structure which links the various approaches. Such a framework is constructed here. A partial equilibrium model of regulation in a competitive, negative externality generating industry is formulated and the concept of a regulated equilibrium defined. Regulatory controls over economic behaviour are ineffective without enforcement. In the absence of enforcement the regulated equilibrium coincides with the unregulated competitive equilibrium. Enforcement is by means of an expected monetary penalty. The effects of changes in policy instruments on the regulated equilibrium are derived. Within this otherwise identical framework two competing hypotheses concerning the aims of regulation are introduced, namely the Naive Public Interest Approach and the Capture Theory. Each objective is defined within the regulatory environment realizing that enforcement is costly. Optimal regulatory policy under each hypothesis is determined and policy responses to parameter changes are analysed. Most theories of economic regulation are set in a partial equilibrium framework. The implications for regulation and enforcement of the regulation's impact on sectors of an economy other than that which is directly affected are therefore not considered. These ignored sectors may, however, affect the outcome. In light of this the present model is reformulated in a simple general equilibrium context. Resource requirements for enforcement are explicitly considered in the derivation of the economy's regulated equilibrium locus of which the optimal equilibria under the competing regulatory hypotheses form a part. The behavioural characteristics of these policies are derived and compared. It is shown that potentially observable differences in regulatory policy exist from which the regulator's objectives can be inferred.