EGT1 Task 3

Task 3 EGT1 Anna Kinton Western Governors University Student ID: 000195178 Student Mentor: Pat Hardy

EGT1 Task 3 In this paper, I will be discussing industrial regulation, social regulation, and natural monopolies. I will be explaining how and why they exist and how they have impacted society. Additionally, I will be summarizing the Antitrust Laws, identifying three main regulatory

commissions of industrial regulation, and explaining the major functions of the five primary federal regulatory commissions that govern social regulation. Industrial regulation is a type of regulation where the government concerns itself with public services in certain industries, like public utilities, and how much the consumers are charged by companies for the services. Industrial regulation exists to serve in the public's interest. It exists to moderate things like public services and control prices for those services. Industrial regulation comes from the public interest theory of regulation, which states that a natural monopoly must be regulated in order to prevent it from becoming a regular monopoly that charges monopoly prices, which also harms society and consumers. Industrial regulation affects the market by increasing costs and decreasing efficiency, as well as perpetuating monopoly. An unregulated firm is always seeking to reduce its operating costs as it increases its output because this increases its take-home profit. If an industrial regulated firm does the same thing, the regulatory commission will eventually require the firm to lower its prices because the firm's operational costs are so low. The firm is only guaranteed a fair return on their services. Therefore, an industrial regulated firm has no justifiable reason to decrease its operating costs because it won't be able to increase its profits by much. Instead, the firms can pass on the operational costs to the consumers. Additionally, sometimes industrial regulation causes natural monopolies to exist much longer than what is necessary, long after they are actually still considered a natural monopoly by definition. The entities affected by industrial regulation are firms that provide public services, like water and electricity, monopolies like Microsoft and AT&T, and oligopolies like Kellogg, General Mills, Post and Quaker cereal manufacturers. Industrial regulation keeps public utilities from

EGT1 Task 3 acquiring too much money and keeps the prices consumers are charged at a normal rate. For large

incorporations like Microsoft and AT&T, regulatory commissions can take monopolistic companies to court and have them split up into more than competing company. And, for oligopolies like Kellogg, General Mills, Post, and Quaker, industrial regulation also keeps them from getting setting too low of prices, becoming too large, or committing acts of anti-trust with one another. The point is to regulate the companies that are a monopoly and keep them from barring other firms entry into the market. A natural monopoly is one thing, but keeping anyone else from entering the market through pay-offs, agreements, and other maneuvers is in violation of anti-trust laws. While industrial regulation is concerned with prices, social regulation is concerned with the impact that production has on society, as well as how the goods are produced and the quality of the goods. Social regulation applies to more firms than does industrial regulation, which focuses on monopolies. Social regulation exists to protect the consumers from false advertising of a product and also faulty construction or harmful contents of a product. Entities that are affected by social regulation are numerous, ranging from factories to restaurants to stores. Social regulatory commissions, like the Food and Drug Administration, the Occupational Safety and Health Administration, and the Environmental Protection Agency, can inspect products and working conditions to ensure they meet a certain standard of safety for consumers. Social regulatory commissions dictate the conditions that are to be met for products and production environments in order to protect consumers as well as employees. A natural monopoly is an industry in which one firm can produce a good or provide a service at a much lower cost than could one or more firms providing the same goods or services. Competition in the industry in which a natural monopoly exists is uneconomical because the competition wouldn't be able to charge as low a price as the natural monopoly and therefore wouldn't be able to turn a profit. Natural monopolies are established when the start up costs are too high for multiple firms to enter the industry.

EGT1 Task 3 The economic theory of regulation, or public interest theory of regulation, states that industrial regulation is essential in maintaining a natural monopoly from turning into a regular monopoly that charges monopoly prices, which is harmful to society. Certain things are public resources, something generally everyone needs or will use. For example, electricity. Practically

every person in our society requires electricity. The start-up cost for creating a firm that can provide it is steep. There is labor costs, power lines, power stations, producing the power, and many other costs to factor. This naturally occurring high cost bars entry into the industry. Once a firm does make it into the industry and starts producing electricity, which is essential to society, what is to stop them from increasing their costs, like a typical monopolistic firm would? That is where industrial regulation steps in by keeping the prices charged to society at a fair return level: making sure the firm makes a profit, but is not charging an extreme price simply because they can. There are four major pieces of legislation known as the Antitrust Laws that prevent monopolies and foster competition. The first one is the Sherman Act of 1890. It prohibits monopolization and anything that prevents trade, like price-fixing and agreements between firms. The second is the Clayton Act of 1914, which basically elaborated on the Sherman Act and prevented price discrimination and manipulative contracts, such as requiring the purchase of one or more other products in order to buy the only product a consumer really wanted in the first place. It also prevents company board directors from serving on a competing company's board of directors, and it prevents firms from acquiring stocks of competing firms I when that would stifle competition. The Federal Trade Commission Act of 1914 was created to enforce the anti-trust legislations. Amended in 1958, it also protects consumers from false advertisement and misleading information regarding products. The Celler-Kefauver Act of 1950 amended the Clayton Act by closing the loophole firms were using to acquire assets of a a competing firm. There are three main regulatory commissions of industrial regulation. The first is the Federal Energy Regulatory Commission of 1950, which regulates electricity, gas, gas pipelines, oil

EGT1 Task 3 pipelines, and water power sites. The second is the Federal Communications Commission of 1934, which regulates the telephones, television, cable television, radio, telegraph, CB radios and ham operators. The last one is various state public utility commissions throughout the years, which regulate their local electricity, gas, and telephones. There are five primary federal regulatory commissions that govern social regulation. The Food and Drug Administration exists verify safety and effectiveness of food, drugs, and cosmetics. The Equal Employment Opportunity Commission exists to regulate the fair treatment of workers regarding promotions, hiring, and discharge, and to limit employer discrimination towards employees. The Occupation Safety and Health Administration exists to ensure that work places are safe for the workers. The Environmental Protection Agency regulates pollution of the air and water as well as noise pollution. They ensure that firms are disposing of things like toxic waste

appropriately and in a way that won't harm society. Consumer Product Safety Commission exists to protect consumers from faulty, inferior, or harmful products, like products that were produced with a flaw that could cause a consumer bodily harm.

EGT1 Task 3 References

McConnell, C. R., Brue, S. L., & Flynn, S. M. (2012). Economics: principles, problems, and policies. New York: McGraw-Hill.