Operating controls are government’s regulations or standards that limit undesirable behavior by compelling certain actions while prohibiting others. Regulation through operating control, that is, control through government directive is an important and growing form of regulation. These regulations are designed to limit or control socially undesirable activities of firms. This tool of regulation is one of the most popular methods of correcting market failure due to negative externalities. Through these means, the government will protect and advance that public interest in health, safety and security, the quality of the environment, and the social and economic well-being of people.
Government sets the rule of game for the operation of private sector business activities. The legal framework sets the legal status of business enterprises, ensures the rights of private ownership, and allows the making and enforcement / implementation of contracts. Government also establishes the legal “rules of the game” governing / administering the relationships of businesses, resource suppliers, and consumers with one another. Units of government can judge economic relationships, try to find foul / dishonest play, and exercise authority in imposing appropriate penalties.
Forms of Operating Control
Operating controls may be in various forms:
i) Control over environmental pollution
Environmental pollution is a negative externality created by private business firms involved in production activities. Government uses its different tools to correct the negative externality. For example, government sets limit for automobile emissions, fuel efficiency and safety standards to control environmental pollution. The government of Nepal, for example, has introduced Nepal Vehicle Mass Emission Standards 1999 (2056 B.S.) to control pollution created by vehicles. The role of the Environmental Protection Agency (EPA) of the US Federal Government is to control pollution.
ii) Control on food products
Firms involved in the production and sales of food products, drugs and other substances could harm consumers by producing and/or supplying low-quality or substandard items. So, it is essential to regulate such production activities. Government regulates such activities through food and drug acts. The act designed by the government to control the quality of Food forces the private business to maintain the standard mentioned in the act.
For example, The Pure Food and Drug Act of 1906 in the US sets rules of conduct governing producers in their relationships with consumers. It prohibits the sale of adulterated and misbranded foods and drugs, requires net weights and ingredients of products to be specified on their containers, establishes quality standards which must be stated on labels of packaged foods and prohibits deceiving claims on patent-medicine labels. These measures are designed to prevent false activities by producers and to increase the public’s confidence in the integrity of the market system.
iii) Industrial work conditions
Government controls the working environment of a factory by using labor laws and health regulation including the provisions relating noise levels, toxious gases and chemicals, and safety standards. For example, The Occupational Safety and Health Administration (OSHA) agency of the US Federal government requires that employers inform workers about risks and mandates firms to reduce risks.
iv) Wage and price control
Government also regulates wage through minimum wage law and price is also regulate to control inflation. Wage and price control policy of the government limits the freedom of the firm to determine wage and price.
v) Control in the operation of financial institutions
Government attempts to control the loan advancing activities of commercial banks by setting the minimum required reserved ratio (RRR) under which every commercial bank is required to keep certain percent of the deposit in cash. Banks cannot advance loan by undermining that RRR.
vi) Control in transportation
Government also regulates the operation of airplanes and vehicles. For example, the government fixes the limit of the weight of luggage / baggage in airplanes, (normally up to 15 kg, it is free and beyond that passengers have to pay additional charges), prohibition on carrying passengers on the top part of passenger buses, the Federal Aviation Administration (FAA) of the US sets standards for airline safety whereas The National Highway and Traffic Safety Administration (NHTSA) monitors risks and sets standards for automobiles and highways.
Cost and Benefits of Operating Controls
The question of who pays for such regulation is seldom answered by simply referring to the point of tax collection or point of the incidence of tax burden. This economic cost of regulation is often transferred to consumers or suppliers, as determined by the relative price elasticities of the demand and supply functions.
We can discuss the benefits of much operating controls in terms of information and risk. We know that there are externalities associated with information and risk. If every person who flew on an airplane had to have it checked for safety, the costs would be huge. It is much cheaper to have an agency like the Federal Aviation Administration (FAA) checks for airline safety. When the FAA sees a way to make a change in safety requirements that will reduce risk and thereby save lives, it has the authority to require that the airlines make these changes. Similarly, it would be costly for each consumer to check the accuracy of all advertising claims, or to test the efficacy of a new drug. By giving the Food and Drug Administration (FDA) of the US Federal government, the responsibility for testing new drugs, the public saves considerably on time and effort.
To be sure, without the government, private organizations would probably keep going to provide testing and information about products. Consumers Union is one such organization and many industries in the US economy have private watchdog organizations. But because of information externalities, the private actions would probably fall short of the efficient level.
The benefits from providing information about risks must be considered in light of the costs. The FDA might hold back a new drug for testing to reduce risks but this is costly to the people whose lives could be saved if the drug were approved. The building code requirements for a construction site might raise the cost of construction significantly. Frequently, these costs are not visible. No one knows that an illness might have been prevented with a new drug, but everyone knows when a faulty new drug causes severe illness or death.
The actions of the FDA, Occupational Safety and Health Administration (OSHA), and other agencies of the US Federal government involved in social regulation are frequently criticized because of the costs they impose on firms and consumers. Very angry letters and critical editorials about the costs are common. It is very difficult to estimate the costs, but some economists have tried. It has been reported that the cost estimate of implementing the operating control measures in the US economy ranges from around 3 to 5 percent of GDP per year for all programs. On the other side, the programs are popular, and they clearly do reduce risks and provide information.
Ultimately, the degree of government intervention will be decided in the give and take of the political process. But careful cost-benefit analysis on a program-by-program basis, as urged by many economists, would help in the decision-making process.
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