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THE THEORY OF ECONOMIC REGULATION

George J. Stigler. THE THEORY OF ECONOMIC REGULATION. Introduction. The state is a potential resource or threat to every industry in the society. Power to prohibit or compel, to take or to give. Can and does selectively help or hurt a vast number of industries. Unique Power.

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THE THEORY OF ECONOMIC REGULATION

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  1. George J. Stigler THE THEORY OF ECONOMIC REGULATION

  2. Introduction • The state is a potential resource or threat to every industry in the society. • Power to prohibit or compel, to take or to give. • Can and does selectively help or hurt a vast number of industries.

  3. Unique Power • The state has the power to coerce. • Can seize money by the only method which is permitted by the laws of a civilized society: Taxation. • Can order the physical movement of resources. • Can determine the economic decisions of households and firms without their consent.

  4. Central Tasks of The Theory of Economic Regulation • Who will receive the benefits or burdens of regulation. • What form the regulation will take. • The effects of regulation upon the allocation of resources.

  5. Central Thesis • Regulation is acquired by an industry and is designed and operated primarily for its benefit. • Assumption: Political systems are rationally devised and rationally employed.

  6. Alternative Views • Regulation is instituted primarily for the protection and benefit of the public at large or some large subclass of it. • The political process defies rational explanation.

  7. What Benefits Can The State Provide an Industry? • Subsidies • Barriers to entry • Manipulation of substitutes and complements • Price controls

  8. Quest For Legislation • Industry which seeks political power must go to the appropriate seller, the political party. • The political party has costs of: • Operation • Maintaining an organization • Competing in elections

  9. Costs of Obtaining Legislation • An industry which seeks regulation must be prepared to pay with the two things a party needs: votes and resources. • These costs typically increase with the size of the industry.

  10. Limitations Upon Political Benefits • The distribution of control of the industry among the firms in the industry is changed. • Procedural safeguards required of public processes are costly. • Political process automatically admits powerful outsiders to the industry’s councils.

  11. Analysis • Licensed occupations have higher incomes • The membership of the licensed occupations is more stable.

  12. Conclusion • The preceding analysis of licensed and unlicensed occupations coincides with the central thesis of this paper. • Regulation is sought by an industry primarily for its benefit.

  13. References Stigler, George J. “The theory of economic regulation.” The Bell journal of economics and management science (1971): 3-21.

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