The paper "Regulation Theories - Public Interest Theory and Private Interest Theory " is a good example of a finance and accounting coursework. There have been a lot of debates and arguments over the years surrounding regulation. The few individuals who believe in the efficacy of the market believe that market regulation is not a necessity because the market forces function to best serve society and ensure optimal resource allocation. However, there are some markets that do not operate in the society’ s best interest at heart, in order to ensure that these markets operate in the society's best interest there needs to be an intervention by the government in the form of regulation.
Regulations help to protect society from the markets objectionable activities. Accounting and accountants are now subjected to various forms of regulations. Laws have been set to govern the functions of organizations which includes disclosure of the financial information. There are also taxation laws influencing the making and functioning of professional organizations. Regulations have become a part of the 21st century. This section describes and evaluates three regulation theories, namely: Public Interest Theory This is an economic theory developed by Arthur Cecil Pigou, it maintains that the supply of regulation is a reply to the public demand for correction of inefficient market prices.
The advocates of this theory view its purpose as that of attaining certain publicly wanted results which, if trusted upon the market to achieve then the results would not be obtained. The assumptions that underlie the motivation of this theory include: The markets are to an extreme degree friable and apt to function inequitably if left alone, here the government is presumed as the neutral arbiter.
Another assumption is that the theory maintains that the government controls banks to facilitate them to operate efficiently by improving market failures for the broader civil society benefit. Determining the definition of public interest is considered a normative question and the supporters of positive theories would definitely disagree with this approach on the foundation that it is impossible to establish the objective aims of regulation. The public interest theory intervenes in case of monopolies, provision of public goods, externalities and imperfect information. Private Interest Theory (Capture Theory) This regulation theory was created as an option to the public interest theory, when many empirical facts supported and aided that regulation was practised in the goodwill of the regulated organizations, with no regard to the public interest.
According to Beaver (Beaver, 164), the capture theory can be explained as a situation where the main beneficiaries of the regulation are the organizations being regulated instead of the public. In other words the regulatory agency instead of controlling the organizations, it is controlled by the organizations. Being a positive theory, it makes an assumption that regulators or the political actors maximize the utilities.
Even though the utility is not indicated it seems to refer to securing and upholding political power. In order for this to happen the political actors and regulators require resources that are provided by the organizations affected by the regulatory laws. This leads to the regulatory body being used by individuals to further their own private goals instead of public interests. The capture theory relies on neo-classical economic adoption of self-interest to foresee the regulator's behaviour because many politicians formulate policies that guarantee their continuance in office.
Criticism of this theory is that it does not provide a reason as to why regulated organizations are able to only capture already established agencies instead of procuring the creation of the agency and there is no reason implying that the regulated organizations are the only interest group capable of influencing the regulator.
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