Module 3 –> Government Regulation of Business

a situation in which the free market, operating on its own, does not distribute resources efficiently -- leads to government intervention

Imperfect information, assumption of rational decision making, monopolies, externalities, public goods

Government regulates to improve information/reduce the effects of inadequate information

Government regulation creates and enforces rules to restrict monopolies (exclusive possession/control of the supply/trade in a commodity or service)

Government regulation to reduce/increase externalities

Government regulation to produce necessary public goods

Correction of market failure

The constitution, industry, bureaucrats

Provides compelling motivations for government involvement such as the establishment of justice and promotion of general welfare

Sometimes regulation are requested by an industry for its own benefit (ex: subsidies and tax advantages, regulated monopolies, licensure requirements)

Desire of entrenched beaureaucrats (run a government/big company) to secure and maintain their positions of power and employment

Separation of Powers, Supremacy Clause, Commerce Clause

Divide the national government into three branches--legislative, executive, and judicial-- establishing the Separation of Powers (each level of government has a separate and distinct role to play)

Separation of powers between state and federal governments

Article VI, paragraph 2: Federal law = supreme/federal preemption over state and local laws

a principle asserting the supremacy of federal legislation over state legislation when both pertain to the same matter

The clause in the Constitution (Article I, Section 8, Clause 1) that gives Congress the power to regulate foreign and interstate commerce (business activity)

Federal power expanded to include not only persons engaged in interstate commerce, but also activities affecting interstate commerce

Must relate to economic activity

Police Power - All "powers not delegated" to the federal government are "reserved to the States"

State authority to regulate commerce

Restriction on states' authority to pass laws that substantially affect interstate commerce

Restricts states police powers/power to regulate commerce

A particular government unit established to accomplish a specific set of goals and objectives as authorized by a legislative body - known as the "fourth branch of government"

-federal trade commission (FTC)
-federal communications commission (FCC)
-securities and exchange commission (SEC)
-environment protection agency (EPA)

first federal regulatory agency, created in 1887 to oversee interstate railroad procedures

Great Depression and social turbulence in the 60s and 70s

To achieve economic goals/fix market failures

executive and independent

Cabinet-level departments and smaller units within them (ex: department of justice --> FBI = smaller unit within the department of justice)

President has direct control over executive agencies

governmental units that closely resemble a Cabinet department but have narrower areas of responsibility and perform services rather than regulatory functions (ex: CIA and NASA)

Subset of independent agencies; further removed from presidential oversight

A corporation that fulfills an important public interest and is therefore overseen by government authorities to a much larger degree than private businesses (ex: US postal service)

Control of supply, rates, and conduct

Control entry into certain economic activities

FDA decides which drugs enter the market

Set the prices to be charged for the services offered within their jurisdictions

Compel or restrict business conduct

Information - Federal agencies compel companies to disclose consumer information
Standards - Government establishes minimum standards for private sector
Product banishments - Banning a certain products from the market

Provides the framework for agency rule-making and details broad standards for the judicial review of agency decisions

Protecting the public by ensuring compliance with laws and regulations - conduct inspections and investigations and collect information

Agencies create rules that become laws through the APA rule-making process

Procedural, interpretive, and legislative

rules issued by an administrative agency establishing its organization, method of operation, and rules of conduct for practice before it - do not have force of law status

Administrative agency rules that simply declare policies or explain the agency's positions and do not establish any legal rights or obligations

An administrative agency rule that carries the same weight as a congressionally enacted statute.

- Publication of a notice of proposed rule making in the "Federal Register" (daily publication of all federal rules, regulations, and orders)
- Agency permits written comments on the proposal or holds public hearings
- Agency either discontinues the process or prepares the final rule

Agencies seek judicial proceedings to enforce agency rules (rule-making, adjudication, administrative hearing)

Involves standards to be applies to future conduct of a class of unspecified parties

Results in "making law"

Addresses specific parties involved in a specific present/past dispute

Results in establishing a judicial-like precedent

a trial-like judicial proceeding, without a jury and held by an Administrative Law Judge (ALJ), in which an administrative agency rules on matters of the law that the agency is charged with enforcing

- President appoints the administrators of agencies
- Issuing a new rule requires: (1) Cost benefit analysis (2) Agencies must cite a specific market failure

Agency rules and orders can be challenged in court

- Congress creates/dissolves agencies and can control agency budgets
- Oversees agency action
- Intervenes directly by amending or passing legislation

1. Excessive regulation
2. Insufficient regulation
3. Ineffective regulation