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  1. Economic market regulation




    Those who believe in the efficacy of markets argue that regulation is not necessary as market forces will operate to best serve society and optimize the allocation of resources.”    




Subject Economics Pages 10 Style APA


“Those who believe in the efficacy of markets argue that regulation is not necessary as market forces will operate to best serve society and optimize the allocation of resources.” (Gaffikin, 2005, p.3). In other words, Gaffikin (2005) implies that those that support the efficiency of the economic market argue that regulation is not obligatory as market forces are capable of operating to best serve the society and optimize the distribution of resources. However, others also believe that the market does not always operate efficiently and in the general societal interest. Therefore, some forms of regulation are necessary. This argument is based on the past economic hitches experienced in the global market due to the lack of proper regulations. For example, the economic meltdown in 1930s, corporate accounting scandals such as WorldCom and Enron in the United States, and the 1997 financial crisis in Asia all indicated the need for intervention in the market for the good of the society. Intervention in the market entails different aspects of regulations from corporate laws, guidelines in the corporate Act to corporate legislative requirements like stock exchange requirements and professional accounting standards. This paper critically discusses arguments for and against market intervention and efficient allocation of resources.

            Opponents to the market efficiency disagree with the argument that the market forces of demand and supply are capable of solving market problems. Thus, they advocate for market regulation as the solution to market anomalies. Some of the arguments for intervention are discussed below. 



Regulation Addresses Market Failures

            Firstly, regulation is necessary to address market failures which affect the general public. Generally, markets forces fail to recognize externalities in the market place earlier enough to maintain an optimal distribution of resources. According to the theory of public interest, regulation is required to achieve certain results desired by society (Gaffikin, 2005). These results are usually unattainable if left to the market forces as suggested by the free market supporters. The theory states that regulation is a result for the demand by the society for corrective measures to inequitable and inefficient markets and therefore should be pursued for societal interest as opposed to the private interest of a small group of the market participants. Development of monopoly powers within the market is an example of a market failure that affects the interest of the public thus require intervention. For instance, this was experienced in the United States during the 20th century where there was a potential growth of monopolies that charged higher prices to consumer goods. To address this, the government legislated Sherman and the Clayton Acts to discourage anti-competitive practices that affected commodity prices.      

Regulation is Necessary to Address Market Anomalies

            Since the market does not always operate efficiently, it is associated with certain anomalies that affect equitability and economic stability. To limit the effect of these anomalies, regulations are necessary. For example, in a study to examine market anomalies before and after a financial crisis in Brazil, China, India and Russia, Muruganandan, Santhi and Jayaraman (2017) found out that all stock markets that experience Day-of-the Week effect (DOW) prior to a financial crisis fails to record the same during and after the crisis leading to efficiency in the market. In the study, stock markets in Brazil, India, and Russia all showed DOW-effect prior to the financial crisis in 2008 but failed to experience the anomalies between 2008 and 2016 (Muruganandan, Santhi and Jayaraman, 2017). This is because during and immediately after a crisis rules and regulations in the markets changed making the information available to all investors. The study also is evident that the efficient market model is only valid when regulations are enhanced. 

Accounting Regulation Enhance Consistency

            Regulation of accounting practices enhances consistency and expert knowledge through standardization (Madsen, 2011). Accounting regulation provides accountants and auditors with guidelines in which they can base or justify their actions and decisions thus improving their professionalism. Regulation through standardization also stimulates market activities through the elimination of unnecessary costs. For example, currently, accounting standards regulating bodies require corporate organizations to disclose their financial information to the members of the public. This makes it easier for investors to obtain and compare information. Accounting regulation also prevents malpractices in the market. For the better part of the 20th century, the accounting profession decided to take the self-regulation approach. However, the approach was associated with corporate accounting scandals which led to the legislation of the Sarbanes-Oxley Act in the United States and increased international need for more transparency.

            Again, entities operating in the market have regulations in place that guide their establishment, management and winding up as indicated by the institutional theory of regulation.  The theory states that social processes as well as corporate structure and arrangements shape regulation. This implies that regulation originates from an institutional structure and social settings (Baldwin, Cave, & Lodge, 2012). Thus, regulation is driven by corporate arrangement and guidelines. This shows the importance of regulation in corporations that should be extended to the market for efficiency.

Intervention Improves Equality in the Market

            As experienced during the industrial revolution in the 19th century Britain, the laissez-faire market system tends to promote unequal distribution of wealth, income and opportunities to members of the society despite the existence of market forces. Regulation is required in the market to redistribute these resources within society. According to the theory of diminishing returns, as the level of income rises in the free market, the marginal utility declines (Pettinger, 2017). For instance, if an individual’s annual income increase from $1 million to $1.5 million, there is only a marginal increase in utility. Conversely, a 20 percent increase in an individual’s weekly wage of $30 causes a significant boost in the quality of life. Therefore, market regulation encourages the redistribution of resources for the gain of society.

            The regulated market also promotes fairness. In the laissez-faire market admittance to resources and opportunities are not only gained through hard work and ability but also through privileges derived from monopoly powers that allows corporations to pay low wages while charging high prices on basic household goods and services. Intervention promotes competition in the market making it difficult for firms to exploit the society. This creates fairness that cannot be attained without regulation. Besides, Rawls social contract theory an ideal community is one where the situation, family or place of birth does not determine economic capabilities and anyone is happy where they are born. This theory may not be appropriate in the free market since many would not be happy about where they were born as resources are concentrated among a small group of market participants. 



Failure of the Market Forces to Address Social and Economic Ills

            Contrary to the proponents of the laissez-faire market system, others believe that the market forces of demand and supply cannot solve major economic and social ills caused by market activities. Therefore, regulation is vital in the market place. Intervention in the market regulates social and economic problems such as poor working conditions, child labor and profit skimming by corporations which otherwise can affect the lives of many participants. Since entities operate in the free market system in pursuit of self-interest, they may decide to supply goods and services only to a segment of consumers that will generate higher returns while ignoring other demographics (Gaffikin, 2005). This may lead to serious economic problems to other market participants. When regulations are in place, such vices can be regulated for the well-being of society. For example, in Australia, the government offers guidelines on the provision of telecommunication services to ensure that every segment receives these services irrespective of where they live. Similarly, different governments and labor organizations have minimum conditions that must be met by an employer to protect their employees in the workplace. Without such regulations, many workers are likely to suffer in one way or another.

            The proponents of the laissez-faire market system, on the other hand, argue that regulation in the market is not necessary since the market forces are capable of serving the society and optimizing the distribution of resources. This approach to the market system fails to consider regulation as a way of improving market efficiency. Some of the discussions for the argument are presented below.   



Ineffectiveness of Regulations in the Market (Conflict of Interest)

            Advocates of the laissez-faire market system consider regulations in the market as ineffective due to conflict of interest.  This conflict of interest is demonstrated by capture theory regulation. Capture theory states that government officials who are also the regulators are utility (political power) maximizers thus they are captured by the market participants (Majone, 1996). In order to retain their political power, regulators depend on financial donations from market participants to fund their political campaigns. Given that the donors are affected directly by the regulations made, corporations find a way of influencing the process through their political donations. In this case, regulators are captured by a small group of entities in the market after their own interest thus the conflict of interest. Similarly, the public choice theory highlights that individuals in the government are likely to behave in a way that maximizes their own interests. Regulation in the market with an aim of redistribution of income other resources may take different forms including industrial entry restrictions, encouraging complementary commodities, price fixing and suppression of competitive goods (Stigler, 1971). Since regulators will tend to find a way through the regulatory objectives to maximize their own welfare, efficiency will not be realized in the market. Contrary to the opponents of market efficiency, this theory indicates that private interest will be served even when regulation exist in the market because regulators will only pass policies that will enable their re-election.

Regulations Increase Market Participation Cost

            With every law by regulatory authorities comes compliance cost that is incurred by the market participants thus limiting the distribution of resources. Some regulatory requirements are always complex with high compliances costs which are incurred by the target corporations. Market regulation may take various form including marketing and advertisement, banking and financial, manufacturing or environmental regulations. These laws affect the participants in the market by increasing their cost of doing business. As a result, the additional costs interrupts the market forces of supply and demand by increasing prices of goods and services to consumers and lower profits for the producers. This limits resource distribution within society.

Voluntary Information Disclosure

            According to the market-for-manager theory, managers will always be motivated to implement strategies that maximize the value of the corporation and voluntarily report their financial performance even when there are no requirements for the disclosure of financial information. The theory derives managerial motivation from the argument that the full disclosure of the past financial year by the management will impact the company’s performance in the future. The perfect reputation developed over time due to the positive financial performance also is reflected in the future remunerations provided that there is efficacy in the labor market.   

Corporate Social Responsibility

            Regulation is also viewed to be irrelevant in the current market because other participants such as consumers are not likely to associate with corporations that are not socially responsible. For example, over a decade ago the Australian government failed to add particular guidelines to the corporation Act but as an alternative resolved that companies would be encouraged to take care of the environments and function in a socially responsible manner by the market forces. The Government believed that members of the public would not tolerate companies that are not “doing the right thing” (Kalt & Zupan, 2010). As a result, no regulations were obligatory since people would not buy products, invest, or associate with the organization that does not take care of the environment. The decision by the government not to implement rules can be explained using the following concepts.

            In summary, irrespective of the adopted approach to market efficiency and regulations, the problem of determining public interest remains a challenge. In addition, market forces have failed to restore market efficiency on several occasions and so have regulations. However, regulations offer more to society than the market forces in terms of efficiency




Baldwin, R., Cave, M., & Lodge, M. (2012). Understanding regulation: theory, strategy, and practice. Oxford University Press on Demand.

Gaffikin, M. (2005). Regulation as accounting theory.

Kalt, J. P., & Zupan, M. A. (2010). Capture and ideology in the economic theory of politics. The American Economic Review, 74(3), 279-300.

Madsen, P. E. (2011). How standardized is accounting? The Accounting Review, 86(5), 1679-1708.

Majone, G. (1996), Regulating Europe, London, Routledge.

Muruganandan, S., Santhi, V. and Jayaraman, A. (2017). Calendar Anomalies: Before and After the Global Financial Crisis in Emerging BRIC Stock Markets. Retrieved from https://www.researchgate.net/publication/319365679_Calendar_AnomaliesBefore_and_After_the_Global_Financial_Crisis_in_Emerging_BRIC_Stock_Markets 

Pettinger, T. (2017). Should the government intervene in the economy? Retrieved from https://www.economicshelp.org/blog/5735/economics/should-the-government-intervene-in-the-economy/

Stigler, G. J. (1971), “The Theory of Economic Regulation”, Bell Journal of Economics and Management Science, v 6, pp3-21.



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