What is Regulatory Capture?

Once upon a time, it was commonly believed that regulation was written to maximize the good to society. Since the 1970s, the economic theory of regulation has come to the foreground in policy research. Simply put, constituents demand favorable regulation and politicians supply it in return for political support. When making policy decisions, regulators weigh political support on both sides. The group that creates the most political pressure usually prevails, and in most cases this is likely to represent private interests, not the consumer. "Regulations actually benefited the regulated industry at the expense of consumers." Watch as Susan Dudley, George Washington University professor, explain the concept of Regulatory Capture. Source: EconFree YouTube channel.

Transcript:

Regulatory capture is an old theory of regulation that suggest that the regulators or the regulatory agencies will be captured by the very industries that they regulate. For example, regulation of airlines. The regulations actually benefited the regulated industry at the expense of consumers. And it was only with the deregulation that we saw in the late 1970s that airline prices came down, innovations exploded, but it was by removing that regulation that consumers benefited.

You tend to see larger companies seeking government favors. In part because bigger businesses have the ability, they've got the Washington office, they've got the resources, they've got the lawyers and the lobbyists, they can deal with the government regulation. Whereas the smaller companies don't have that ability.

When I was in government I saw cigarette manufacturers asking for FDA regulation of cigarettes. I saw biotechnology companies asking for regulation of biotechnology products. You often will see business groups and environmental groups or consumer groups seeming to work together. Or in fact sometimes the business support of regulation is invisible. An example of that would be appliance efficiency standards. In particular, washing machine standards that were set several years ago. The washing machine manufacturers actually wrote the regulation. And when you read the transcript of their meeting, they argued for the regulation saying: here we are creating these expensive new washing machines that are much more energy efficient, and yet people aren't buying them. The consumers come to the show room, they see the expensive machine, we tell them it will cost them less over the life of the machine, and they say no we still would prefer to buy this less expensive machine, even if it uses a little more water.

They argued in these transcripts that if we can get the government to require the expensive machine then we won't have to worry about consumer acceptance anymore, because they will have no choice. And sure enough, the new energy efficiency standards were set for washing machines, never mentioning that goal, the goal was only on energy efficiency. So, a high noble goal, but meanwhile it was really supported by the business that would benefit.