Regulatory Capture

Definition

Regulatory capture is a situation where a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating. This phenomenon can have significant implications for the effectiveness and fairness of government regulation across various economic and political contexts.

5 Must Know Facts For Your Next Test

1. Regulatory capture can lead to regulations that favor the regulated industry over consumers, competitors, or the general public.
2. The revolving door between regulatory agencies and the industries they oversee is a common contributor to regulatory capture, as former regulators may take jobs in the private sector and vice versa.
3. Regulatory capture can undermine the effectiveness of government regulation, resulting in suboptimal outcomes for society and the economy.
4. Special interest groups often use lobbying, campaign contributions, and other political influence tactics to shape the regulatory environment to their advantage.
5. Regulatory capture can be a significant flaw in the democratic system of government, as it allows narrow interests to override the broader public interest.

Review Questions

• Explain how regulatory capture can influence the regulation of natural monopolies (11.3 Regulating Natural Monopolies)
  • In the context of regulating natural monopolies, regulatory capture can lead to regulations that favor the monopolistic firm over consumers. For example, the regulatory agency may set prices or service levels that benefit the monopoly rather than ensuring fair and affordable access for the public. This can occur if the monopoly firm is able to exert undue influence over the regulatory agency through lobbying, political connections, or the revolving door between the industry and the agency.
• Describe how regulatory capture may have contributed to the Great Deregulation Experiment (11.4 The Great Deregulation Experiment)
  • The Great Deregulation Experiment in the 1970s and 1980s was in part driven by the perception that regulatory agencies had become captured by the industries they were supposed to regulate. The argument was that deregulation would promote competition and better serve the public interest. However, regulatory capture can also influence the deregulation process, as industry groups may lobby for the removal of regulations that constrain their profits or market power, even if such deregulation is not in the best interest of consumers or the broader economy.
• Analyze how regulatory capture can undermine the democratic system of government (18.3 Flaws in the Democratic System of Government)
  • Regulatory capture represents a significant flaw in the democratic system of government, as it allows narrow special interests to exert disproportionate influence over the policymaking process. When regulatory agencies are captured by the industries they are meant to regulate, the will of the people and the public interest can be subverted in favor of the private interests of powerful industry groups. This can lead to a lack of trust in government, a perception of corruption, and a breakdown in the democratic process, where elected officials and government institutions are seen as serving the interests of a few rather than the broader population.

Related terms

Special Interest Groups: Organized groups, such as industry associations or lobbyists, that seek to influence government policies and regulations to advance their own interests, often at the expense of the broader public good.

Regulatory Agencies: Government bodies responsible for overseeing and enforcing regulations within a particular industry or sector, with the goal of protecting the public interest.

Rent-Seeking: The practice of individuals or organizations using their resources to obtain economic gains from others without reciprocating any benefits to society, often through manipulation of the political or regulatory environment.