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Chapter 2: Economic Regulation: Principles, History and Methods
2 Economic regulation: principles, history and methods Martin Ricketts Introduction Economic regulation is an important instrument of government policy in market economies. We do not talk of regulating planned systems. To regulate implies the exercise of some influence on an activity that is different from total ‘control’. It is no accident therefore that the economics of regulation has become increasingly important in recent years as direct state ownership has declined. The perceived failure of central planning has not in itself discredited all government attempts to improve economic performance. Indeed, the idea that the provision of certain limited but crucial regulatory functions by the state is necessary for economic advance is a well-established part of classical liberal (as distinct from libertarian) economic and political theory. Regulation is not, however, a very precise term. Some forms of regulation are concerned with setting a framework of rules for people to follow in their dealings with each other. In this sense the law of contract or property would comprise part of the regulatory base of the economy. A financial ‘regulation’; for example, that all companies must disclose price sensitive information to the market by means of a public announcement within a specified time period, would be of this ‘rule setting’ type. The regulation applies to all market participants and is ‘end independent’ in the sense that no one could possibly know exactly what would actually happen in every case as a result of introducing it. Although the detailed outcomes are not known, the regulation...
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