An Introduction to the Law and Economics of Regulation
Alessio M. Pacces
Erasmus School of Law, Erasmus University Rotterdam - Rotterdam Institute of Law and Economics; European Corporate Governance Institute
Roger van den Bergh
Erasmus University Rotterdam (EUR) - Erasmus School of Law
August 22, 2011
REGULATION AND ECONOMICS: SECOND EDITION ENCYCLOPEDIA OF LAW AND ECONOMICS, Alessio M. Pacces, Roger J. Van den Berg, eds., Cheltenham: Elgar, 2012
Rotterdam Institute of Law and Economics (RILE) Working Paper No. 2011/03
This chapter provides a general framework to analyze regulation with a law and economics approach. It introduces the volume “Regulation and Economics” of the second edition of the Encyclopedia of Law and Economics. This study intends to provide a state-of-the-art overview of regulatory economics.
The editors review the traditional classifications and theories of social and economic regulation, emphasizing the limitations of these distinctions particularly in the perspective of the choice between liability and regulation. The chapter discusses both the public and the private interest theories of regulation and how they interact in various regulatory domains. The latter are divided in four categories: social regulation; regulation of public utilities; regulation of non-natural-monopolies, and regulation of professions. This introduction also summarizes the main findings of the 17 chapters on regulation included in the volume.
The overall conclusion is that regulation involves a number of sector-specific issues. It is no longer possible to distinguish forms of regulation depending on the kind of market failure they are supposed to address, because in virtually every field regulation has to cope simultaneously with multiple market failures. The implication of this finding is twofold. On the one hand, the ability of regulation to effectively improve on market failure is impaired by the vested interests created by regulation. On the other hand, the actual outcomes of regulated markets depart significantly from the idealized world of perfect competition. The ‘Nirvana fallacy’ that still pervades the academic and the policy debate depends on the failure to acknowledge these circumstances.
Number of Pages in PDF File: 37
Keywords: market failure, regulatory capture, litigation versus regulation, Nirvana economics, public utilities, social regulation, economic regulation, professions
JEL Classification: K23, L43, L51
Date posted: August 23, 2011 ; Last revised: July 23, 2013