Regulations, Standards and Legal Controls


    Regulations, Standards and Legal Controls

    • The government use other methods to correct market failure that doesn’t involve the direct use of the price mechanism
    • These take the form of regulations, standards and legal controls
    • All such controls are used by the government to combat market failure
    • If it was left to the free market, undesirable outcomes would occur
    • The purpose of such controls is to override the workings of the market mechanisms


    • Action by the government on someone breaking the legislature can range from a written warning, to a fine, to a closure of a business


    • In theory, the standards set should achieve what the legislation see as an optimum scale of activity or use
    • If, for example, standards are too low, the polluter receives benefits that are greater than the external costs of the pollution caused
    • If standards are too severe, the polluter might be tempted to emit pollutants into the air or water, particularly if risk of detection is low.


    • To set standards, one needs accurate information, which is often hard to get
    • For example, it is difficult to identify the source of some pollution
    • Once standards have been set, there is no incentive to work in a more environmentally friendly way
    • Nevertheless, regulations and standards are a very important way of reducing many forms of environmental pollution that would otherwise have been unavoidable.


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