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Chapter Ten:
Regulation: Law, Economics, and Politics
True/False Questions:
1) Regulation is government intervention in economic activity using commands, controls,
and incentives.
2) In contrast to antitrust, regulation is not implemented through judicial institutions but
instead by independent commissions and agencies of the executive branch.
3) Antitrust is implemented through independent commissions and agencies of the executive
branch of the federal government.
4) In spite of the fact that regulations are not implemented through judicial institutions, the
courts play a central role in interpreting these regulatory statutes.
5) Regulation is such a broad subject. It does not specify particular industries, products or
conditions.
6) In the United States, the first period of major regulatory change occurred in the 1930’s
during the great Depression.
7) The major period of regulatory changes in the 1860’s and 1870’s brought social
regulation.
8) It is interesting to note that since the 1960’s, while social regulation continued at a fast
pace, major deregulation in important industries occurred simultaneously.
9) Government regulation can be traced to the 1100’s when the Dutch monarchy started to
contract with corporations for services.
10) The U.S. Constitution provides the authority to the Congress to regulate commerce
among states. Yet, it also imposes certain limitations on such authority in the Fifth and
Fourteenth Amendments.
11) The government’s right to regulate is exceedingly broad.
12) There are two basic forms of regulatory agencies. These are legislative commissions and
judiciary institutions.
13) Most commissions make decisions through consensus-rule voting and formal rule-
making procedures.
14) Consensus forming is the most important activity of most regulatory agencies.
15) The Reagan administration sought the elimination of the Consumer Products Safety
Commission (CPSC), but Congress refused.
16) Independent regulatory commissions are immune from Congressional oversight or
interference in their affairs.
17) The courts have considerable influence on regulation through their power to review the
constitutionality of such regulations and/or their conformity with other statutes.
18) Two theories have been offered to explain where regulation is and is not imposed. The
first is the theory of market swings and the second is internationally focused.
19) A monopoly is unnatural if one firm can produce a given set of goods at lower costs than
any larger number of firms.
20) The classical theory of natural monopoly predicts that the monopolists would increase
output resulting in a price equal to marginal cost.
21) In the case of natural monopoly, economic theory recommends that government set the
price to be equal to total cost of the product.
22) An example of network externality is when building a new plant in a certain location will
result in driving the wage pay upward, unless labor supply is perfectly elastic.
23) A pecuniary externality provides a rationale for regulation.
24) A public good may be defined as a good whose consumption by one person does not
reduce its availability to other people. National defense is an example of a public good.
25) Public goods can be supplied by the private sector.
26) Asymmetric information is a form of market mechanism that results in the markets acting
efficiently.
27) Moral hazard means that the behavior is encouraged when people do not bear the
consequences of their actions.
28) A common problem in markets is the incentive for sellers to cheat on the quality of goods
or services.
29) The Chicago school sees regulation as demanded by interest groups and supplied through
the political process.
30) Cross-subsidization occurs when one group of customers pays more and another group
pays less than the cost of providing their services.
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Multiple Choice Questions:
31) Regulation is government intervention in economic activity using all but which of the
following?
a) Commands
b) Controls
c) Incentives
d) Market manipulation
32) Which of the following statements is applicable to regulation?
a) Is not implemented through judicial institutions
b) Is not implemented through independent commissions
c) Cannot be appealed to courts
d) They take place through confidential hearings
33) The courts have a central role to play in regulatory matters. They become involved in all
of these except:
a) Interpreting regulations.
b) Due process requirement.
c) Determining constitutionality.
d) Introducing regulatory legislation.
34) How many major periods of regulatory change has the United States experienced?
a) Two
b) Four
c) Six
d) Eight
35) The major focus of the second phase of regulation in the progressive era and the New
Deal was?
a) Labor and economic regulation
b) Deregulation
c) Social regulation
d) Political regulation
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36) Which of the following statements depicts the evolution of regulation in the past three
decades?
a) Social regulation continued progressively; the movement toward deregulation of
important industries picked up speed
b) Many new regulatory agencies have been created
c) Authority of the existing social regulatory agencies has diminished
d) Economic regulation relies more on the markets and competition
37) In which of the following cases did the Supreme Court rule: “What a company is entitled
to ask is a fair return upon the value of that which it employs for the public
convenience”?
a) Munn v. Illinois
b) Smith v. Ames
c) McDonald v. FTC
d) Mayberry v. Madison
38) The following are all examples of federal regulatory agencies and commissions except:
a) National Labor Relations Board.
b) Environmental Protection Agency.
c) The Federal Reserve System.
d) The Senate Foreign Relations Committee.
39) Which Act provides for the public notice and comment on rule making prior to rules
being promulgated?
a) The Administrative Procedures Act of 1946
b) The Public Hearing Act of 1964
c) The Common Sense Act of 1988
d) The Rules and Policies Act of 1935
40) There are many ways through which the President influences the regulatory process.
These include:
a) Appointment of the agencies administrators.
b) Directing the review of regulations.
c) Policy expertise of cabinet agencies.
d) The President can use all these measures to influence the regulatory process and
outcomes.
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41) The Congress exerts great influence on the regulatory agencies through which of the
following means?
a) Using its budgetary and oversight authorities
b) Appointing the regulatory agencies administrators
c) Using the Office of Management and Budget (OMB)
d) Using the independent commissions
42) Which of the following is a cause of market imperfection?
a) Pure competition
b) Asymmetric information
c) Government has no intervention in the economy
d) Complete free trade
43) In the case of a natural monopoly, economic theory recommends that government set the
price of goods and services to be:
a) Equal to total cost of production
b) Equal to average cost of production
c) Equal to marginal cost of production
d) Equal to the competitors’ price
44) Which one of the following activities could be considered a nonpecuniary externality?
a) Effect of a firm’s new plant on the demand and price of labor
b) The increase in the oil price after the oil shock of the 1970’s
c) Generating pollution by driving a car
d) All the above have nonpecuniary externalities
45) Which of the following is not a public good?
a) National defense
b) Radio broadcasting
c) Bridges and roads
d) Buying a TV set from the army’s surplus store
46) What term below refers to behavior induced when people do not bear full consequences
for their actions?
a) Moral hazard
b) Transaction costs
c) Asymmetric information
d) Free entry and exit into the market
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47) What theory predicts that regulation initially will be found where there are market
imperfections and over time will evolve to serve the interests of the regulated industry?
a) Interest group
b) Capture
c) Flexible
d) Jurassic
48) Capture theory predicts that regulation will be found where there is/are market ______.
a) Perfection
b) Shifts
c) Imperfections
d) Regularities
49) ______ occurs when one group of customers pays more and another group pays less than
the cost of providing their service.
a) Market imperfection
b) Free-riding
c) Moral hazard
d) Cross-subsidization
50) Rent control of the housing market is an example of what type of regulatory use?
a) Cross-subsidization
b) Redistribution of wealth
c) Grassroots domination
d) Voting rights
Essay and Review Questions:
1) Write an essay on the topic of the nonmarket environment of regulatory agencies. Explain
the powers of the President as compared to the powers of the Congress. Give specific
examples.
2) There are several types of market imperfections. Explain the natural monopoly problem,
the different manifestations of this phenomenon, and its results.
3) One of the major types of market imperfections pertains to the concept of public goods.
Explain this type by giving examples. What can the government do to correct or to deal
with such an imperfection in the market?
4) Write short notes explaining and analyzing the following types of market imperfections:
a) Externalities
b) Asymmetric information
c) Moral hazard of the imperfections
d) Public Goods
e) Natural Monopoly
5) The newly elected U.S. President has appointed you to be his Special Assistant for
Economic Affairs. He or she requested that you prepare a concise report on the topic of
“The political economy of regulation.” The President asked you to elaborate on such
concepts as cross-subsidization and cost-based regulation. You were further directed to
make specific recommendations to alleviate some of the major problems in the area of
federal regulations of business. Speculate on regulation in the 21st century.
6) Discuss in some detail the constitutional basis for regulation referring to specific laws
and court rulings.
7) Discuss, analyze and critique the cases of telecommunications, electric power, and
auctions. Be specific and use relevant concepts from the chapter in your analysis.
8) Outline the important issues in the FCC and Broadband Regulation case. What is your
critical analysis of the case?
9) Outline the important issues in the case of FCC Media Ownership Rules. What are the
political and economic implications in this case?
10) What are the main issues in the case of Enron Power Marketing, Inc. and the California
Market? Did EPM do anything wrong?