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As citizens, we often have conflicting feelings about business regulation. On the one hand we recognize that big business has much greater economic power than us mere citizens. On the other hand, we sometimes feel that the governmental bureaucracy can be a little too intrusive, too controlling, as when it prohibits land development in order to preserve the habitat of a particular small species of birds, or some other restriction with which we may not sympathize.
These conflicting concerns point to a key question for both political science and economics: Why does regulation exist? What drives it?
In general there are three major theories of economic regulation: public good theory, capture theory, and special interest theory. These are detailed in the remaining three tabs in this feature.
Key to the following discussion is the role of citizens in policy making, and also the degree of competition among parties interested in a particular area of regulation. In the public interest approach, citizen needs and protections in the face of market failures are central. In the other two approaches citizen needs are not relevant at all. Instead, in those two approaches industries and companies actually demand regulation in order to create conditions for greater profitability.
The main difference between the capture theory and the special interest approach is their treatment of competition among interest groups. In the capture theory only a single group or company controls a particular agency. The special interest approach, by contrast, emphasizes the presence of at least limited competition for agency control among special interests.
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