|The direct and indirect measures used by the government from time to time to control and regulate the private sector are included under the regulatory role. It means, the regulatory roles include all direct and indirect policy measures which the government employs from time to time to control and regulate private business to prevent the growth of socially undesirable|
- To provide patent and subsidy, which provide direct benefit to the business firms.
- To make operating control or levy specific tax. These measures obstruct both the nature of the goods and services produced by the firms and the production processes used in the production of these goods and services.
- Direct regulation on monopoly to ensure enough output and restricts monopoly profit.
- Make provision of antitrust act to maintain the level of workable competition in the economy.
a) Economic consideration
- Failure by market structure: The first type of market failure is the failure by market structure. There should be enough sellers and buyers in the market to get the beneficial effect of competition or ther should be at least the possibility of the easy entry of new firms. Such conditions not fulfilled in some markets. The market for water, telephone, electricity comes under this category. If a single firm, which is called natural monopoly, can serve a particular market efficiently, it has market power. It can earn economic profit by limiting the output and by charging high price. Due to this reason, the price and output of public utilities are being regulated.
- Failure by incentive: The second type of market failure is the failure by incentive. In the production and consumption of goods and services social price and cost is different from private price and cost of producers and consumers. In this way, since market imperfection or market failure does not give the signal of appropriate cost and benefit the government should play an active role in the economy.
b) Political considerations
- Preservation of consumer sovereignty: To protect the choice of consumers or consumer sovereignty is an important characteristic of competitive market. The competition by providing incentive to produce the type and quantity of goods according to the desire of the consumers promotes efficiency. The competition by rewarding private initiative promotes individual freedom to the greater extent. The firms with market power may set higher price by limiting the output to earn economic profit, whereas the competitive firms determine optimal quantity of output according to market price. Therefore, price and output of monopoly can be controlled by regulatory policy.
- Limit concentration of economic and political power: The second objective of regulation is to limit the concentration of economic and political power. In a democratic society, it is not desirable to have economic and political power concentrated in limited persons or groups. It is regarded that the economic and political power remains linked with one other. There are examples of economically active person interfering in politics as well. Therefore, the development of large structures is prevented through regulatory policy.