Reading 7: Economics of Regulation

Page No 173Date / /Reading 7 : o 0 Economics of RegulationNeed for regulatory InterventionRegulations are needed in the presence of :IParetro Opitmal :-Regulation is often req when markets cannot provide efficientSol. Which means that Can cannot make any parti cipantsbetter off without making some other parti cipants worse off2Informational Frictions :- AsymetricRegulation are put in place in an attempt to ensure thatno participant is treated unfairly or is at a disadvantagetoconsumption3Externalities :- Consumpation of public goods (cost is not bore in propation,Cost or benefit that affects the party that did not chooseto incur that cost or benefits For example a pollutermay not bear the full cost of their action4Weak Competition :- Anti trustFewer choices t higher prices and lack of innovation5Social Objectives:-Public good is a resources that can be enjoyed by a personwithout making it unavailable to other.Since people share in Consumption regulations are necessary to ensuran optimal lul of Production of such public goods Page No. 174Date//Regulating Commerce Rule makerCompany law, bankruptcy law, Competitions laws, Contract lawRegulations essential for biz decision making Cey investingin R&D when intellectual property protection is not availabl,Regulatory framwork may held or hinder commerceFor eg. protections of intellectual property facilitate long -terminvest in researchPRegulating Financial MarketsTo prevent failures of the financial systemMaintain the integrity of marketsObjective : 3 Interealed GoalsProject investorsCreate confidence in the marketsEnchance capital formationSecurity markets :-- - Disclosure req promote investor confidenceMitigating agency problem inherent in financial intermedia riesacting as agents Brokers 18As [findishary funtain-Profection for small investor and hence tax regulat environmentfor hedge funds - who only market to qualified individualsprotect unsoficated Investor Coase th eorem Ex Carbon taxPage No 175Date / /Financial Institutions :-- Prudent Supervision to reduce system - -wide risks andet,Systemicto protect investors- Conherent policy globally to prevent regulations arbitrage & Con tgion- Cost behifit analysis also include hiden cost.*Antitrust RegulationExcessive concentration of market shareAnticompeitive behavior (ey discriminatory pricing, bundling,exclusive dealing)CFIAnalysts often evaluate announced merger based on probableregulator responseNote:-Promote domestic competition by monitoring and restricting activitythat reduce or distort competition2Regulators often block a merger that leads to an excessiveconcentration of market share3Anticom behavior such as price collusionally , discrimiatory priciny,bundling & exclusive dealing is often also prohibited. Page No. 176Date / /Type of RegulationStatutes Made byAdministrativeJudicial LawCongressRegulation Sebi thisLaw made byCommon LawRules issued by govtFinding of the Courtlegistative bodies Civil lawagenciesinterpritation ofEUeTypes of Regulators1Goverment agenciesI02Indepent regulator :- Politically indipendent :- FEDReognized by govt & have power to makerules & enforce them . . Not funded by got that by Independer3Self-regulating organization (SRB):-Eg CFAIIndustry self-regulatory bodies (sare private organization that represent as well as regulatetheir members.SRBs may have inherent conflicts of intregulatory resorces utilize the industry professionals withexpertise & all regulators to devote to other priofriturSB SRBs t Govt Recognition = SROEnforcement Power Page No.17717th Dec 2022 SaturdayDate//aOutside bodies (work referenced)CAType of RegulatorsGovt AgerciesIndependent RegulatorsOutside BodiesSROsNon -SRO unreogrizedRecognizedSRBOSelf Regulation in Financial MarketsConflicts of int bet" members of SRO and the regulatoryrole of SROIndependent SROs more common in common - law Countries than (ivi)Independent SROs more effective when properly supervisedlawFINRA is an SRO recognized by the sec in the us FURA'sprimary objective is to projects investors by maintaing theRB)fairness enforces of security us capital laws market & regulation FINRA has the authority toHowever, the use of SROs in civil - Law countries is not Commoin such countries , formal govt agencies fulfill the role of SROsIn common -law countries such as the UK & the us / SRO, havehistory enjoyed recognition.Regulatory InterdependenceRegulatory Capture theoryRegulars end up being influenced by regulated industy / entityRegulatory capture is more likely to be Concern with SROs thanwith govt agencies Page No. 17y/Blackout period are used by Cos to star insider trading DateRegulatory CompetitionRegulators complete to provide the most biz - friendlyRegulatory in diff jurisdictions complite for biz.regulatory enviroment.Regulatory ArbitrageBiz shop for friendly regimes or fied loopholesOccurs when biz shop for a country that allows apspecific behavious rather than a changing behaviourExploiting the diff bet the eco substance & interpretation0of a regulation0Regulatory ToolsIPrice mechanisms :-Tax / subsidy Ey Allowed depSROs and outside bodies are least likely to use price mechanismEg- Sin Tax2Restricting / Requiring certain activitiesRegulatory may ban certain activities (eg : Use of specific chemicalor Feg that certain activities be performedFilling of 10-K reports by publicly listed companiesSROs and outside bodies are least likely to use price mechani3Provision of public goods or financing private projectsprivate projects Ceg small - -biz loans, student loans) depending on theirRegulatory may provide public good Ceg National def ence) or fundpolitical priofities and objectives. Net Regulatory Direct costs of implementation - private benefits + indirectBurdenPage No. 174CostDate / /SROs and outside bodies are least likely to use pricemechanismsNote:-.Effectiveness of regulatory tools depends on enforcementabilities of the regulatorRegulatory tools developed in response to past events maynot necessarily work well under a diff set of circumstancein the future ; the jury is still out on the bail in processBenefits / Costs of RegulationBenefitsEasy to view but difficult to quality difficult to quantityCost:-Law of un intended consigneesSRegulatory burden - Direct and indirect cost of regulation Regulatoryburden Calso Known as govt burdurn ) refers to the costof compliance for the regulated entity Regulatory burden miusthe private benefits of the regulation is known as the net)Consequence of regulations Some unintende consiquense are identifiedregulatory burden. Regulator should be aware of uiatendedbefore inacting the policysmsIMP Net regulation burden: regulatory burden pai- the private benefits of regula"Sunset clause - Regulatory costs are difficult to assess before a regulation includesis out in place. For this reason, 7 many regulatory provisionsasunset clause that req regulators to revisit the cost benefitanalysis based on actual outcome before renewing the regulation Page No. 150Date //Costs easier to assess ex-postEvaluation of a Specific RegulationRegulation Can significantly impact valuationTaxes Review Shrink an industry while subsidies help it to growto includes proposed regulationsIs regulator Captive ? Deminishes negative outcomeDiff type of regulations effects diff industries