Understanding Regulation

Here is another superb piece from Shleifer. It is actually a speech he gave at EFMA in 2004.

What he says is this:

The American and European societies are much richer today than they were 100 years ago, yet they are also vastly more regulated. Today, we live in houses and apartment buildings whose construction – from zoning, to use of materials, to fire codes – is heavily regulated. We eat food grown with heavily regulated fertilizers and hormones, processed in heavily regulated factories with publicly monitored technologies, and sold in heavily regulated outlets with elaborate labels and warnings. Our means of transport, including cars, buses, and airplanes, are made, sold, driven, and maintained under heavy government regulation….

The extraordinary pervasiveness of government regulation in our lives raises a number of questions. Is regulation generally a good idea, as the positive correlation between its growth and the growth of income seems to indicate, or has it been an obstacle to economic and social progress? Have the USA and Western Europe grown in spite of it? How much regulation of a particular activity is appropriate? Does the nature of the activity being regulated, or the characteristics of a country, influence the optimal choice? Is the level of regulation we observe in fact an outcome of efficient social choice, or are other factors as or more important?

He then reviews basic theories of regulation and looks at how regulation can help us achieve more efficient outcomes.

Highly recommended.

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2 Responses to “Understanding Regulation”

  1. Bernanke gives a reality check on systemwide regulation « Mostly Economics Says:

    […] regulation has always been scoffed at and this is dfficult to understand as regulation has been pretty effectivein other markets. Financial markets need better regualtion as information asymmetry is much higher […]

  2. Risk management lessons from Philippe Jorion « Mostly Economics Says:

    […] Why don’t we get the same lesson for financial regulation? Most would say financial regualtion has failed in this crisis but don’t say we need to redo it. Infact most are worried that regulation would stifle financial innovation, would lead to worse outcomes and so on. Why is financial resulation seen as necessarily bad when we live in a world which is highly regulated? […]

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