Controls versus Subsidies in the Economic Theory of Regulation

It is shown that standard principles of economic analysis as applied to the political process lead to the prediction that even producer groups can rationally engage in political activity to obtain subsidy assistance under certain conditions. Specifically, water pollution control and urban transportation were examined by the author; from these he derived two general propositions. First, in contrast with the most widely accepted version of the capture theory of regulation, it was found that government intervention could rationally be used for the protection of strategically-placed consumer groups as well as producer groups at the expense of a larger community. Second, while interest-group protection by the government can originate from the use of coercive power to limit output, it can also result from direct and cross-subsidization in certain industries. While producers can expect net benefits from governmental use of coercive power to limit entry and output in certain conditions, the benefits of a cash assistance to their industry can also be higher than the cost of the political action necessary to obtain such aid. This analysis also suggests that economic regulation is governed by the same laws of government behavior that explain the allocation of resources in the public sector asmore » a whole. There is no economic theory of regulation different from the economic theory of representative government. (MCW)« less