Reading 15: Regulation and Antitrust Policy in a Globalized E following, statements, hypothesis, 2011, class

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Session 4: Economics for Valuation
Reading 15: Regulation and Antitrust Policy in a Globalized Economy

LOS c: Differentiate between the capture hypothesis and the share-the-gains, share-the-pains theory of regulator behavior.

 

 

Which of the following statements regarding regulation is least accurate?

A) Regulators are impartial and their actions are not influenced by industry participants.

B) Regulation has often been advantageous to industry participants because of increased profitability and decreased competition.

C) Regulation has often been disadvantageous to consumers because of higher prices and less product choice.

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Regulators should strive to be completely impartial, but in reality are not because most of them are former industry participants that are likely to still have some ties to the industry. Regulators must be knowledgeable about the industry they are regulating, so naturally the pool of qualified candidates comes from those with experience in the industry.

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The theory of behavior where industry participants are able to exert influence over regulators employed by a governmental regulatory agency is called the:

A) capture hypothesis.

B) share-the-gains, share-the-pains theory.

C) constituency theory.

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Regulators frequently have experience in the industry they are regulating, and are likely to have ties to others remaining in the industry. The capture hypothesis contends that regulators may be “captured” by the special interests of the industry because they are former industry participants.

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In accordance with the share-the-gains, share-the-pains theory of regulators’ behavior, which of the following scenarios is most likely to occur?

A) Regulators allow a portion of an unexpected increase in commodity prices to be charged to consumers.

B) Regulators form policies that are in favor of the special interest lobby of the industry being regulated.

C) The head of a regulatory agency agrees to discuss future price increases with both industry representatives and a consumer group, but in separate meetings.

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The share-the-gains, share-the pains theory would anticipate that regulators allow industry participants to pass only a portion of rising commodity costs on to consumers, and then perhaps over a period of time.

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A recent heat wave in the Southern United States has significantly increased demand for electricity by consumers. At the same time, utilities providers have experienced higher costs associated with the production of electricity because of inefficient and obsolete methods of production. Which of the following statements is most likely accurate?

A) According to the theory of contestable markets, regulators will allow new entrants into the industry to provide additional capacity.

B) According to the premise of social regulation, utilities regulators will not allow any cost increases to be passed to the consumer because electricity is considered to be a basic necessity of life and must remain affordable.

C) According to the share-the-pains, share-the-gains theory, utilities regulators will allow the providers to pass some of the increased costs to consumers over the next two years.

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Under the share-the-gains, share-the-pains theory, regulators cater to three separate groups: industry participants, legislators, and consumers. Therefore, regulators will have utility providers and consumers each absorb some of the price increase.