Essays on Advanced Financial Accounting Essay

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The theories of regulation People usually have different feelings concerning business regulation. The general public recognizes the great economic power possessed by the business and hence the need to regulate it. On the other hand, the public at times view the governmental bureaucracy as being too intrusive and controlling especially when it puts in restrictions that are not welcome by the public. Why does regulation exist then? Generally, there are three theories of regulation which include the public good theory, the capture theory and the special interest theory. The theories together with the assumptions underlying the motivation of regulators are explained below. The public interest theory The theory stems from the perception that the government should step in to regulate markets when they are unable to regulate themselves.

The so called market failures arise when the price mechanism supposed to regulate demand and supply is no longer operational triggering the government to step in. natural monopolies and market externalities are excellent types of market failures. The monopolies arise when the fixed costs of producing certain goods or services is so high that it makes sense for only one firm to produce and supply the good or services (Ahmed, 2004).

Unfortunately, monopolies tend to use their market powers in ways that can be highly detrimental to the society. On the other hand, externalities arise when the costs of producing goods are not fully incorporated into the price of the good. Such cost includes the impact of environmental pollution which can have undesired effects on the surrounding community. Without regulation by the government, there is nothing that would compel the company to minimize environmental pollution or even compensate the surrounding community for bearing the environmental damage. The sorts of market failures described above coupled with the general need for mechanisms of regular public disclosure by the business motivate the government to regulate the business in order to protect the public interest.

This is aimed at protecting the community from the negative impact of the market failure as well as other harmful market behavior. The capture theory of regulationAccording to this theory, regulation exists not because the public needs it but because the regulated industry wants it.

This occurs when a regulatory agency created to act in the interest of the public acts for the commercial interests that dominate the sector or industry it is supposed to regulate. In effect, the agency is captured by the industry it is regulating. The government regulator therefore acts as the decision making head of a now monopolized industry. This is possible when the members of the regulating agency are former and future employees of the industry. Instead of promoting efficiency, the agency creates inefficient resource allocation (Jacint, 2005).

An industry may acquire its regulatory agency since regulatory agencies require a lot of specialized knowledge on the industry. Unfortunately, those with such knowledge can only be found within the same industry. A person might therefore leave the industry for the agency but with the hope of returning back to the industry when his term in the agency expires. Therefore, any decisions passed by the agency will be in favor of the industry rather than the public.

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