Chapter 2: The Rationale For Regulaiton

A basic way that government exerts its power over business is to issue regulations governing private sector behaviour. The use of regulatory power has grown in the U.S., especially in recent decades. Many rationales have been put forth to justify this type of government intervention in the economy, notably the failure of private markets to work well.
Theories of regulation
Responding to natural monopoly conditions

• The classic case for regulation is natural monopoly.
• Traditional policy toward natural monoploy has been to retain the single large firm in a given sector of the economy, but to use regulation to prevent monopolistic exploitation.
• Unregulated monopolies can cause social losses because they restrict production and raise prices.

Encouraging sensible use of natural resources

• Regualtion or other controls may be appropriate where a common resource must be allocated rationally or where there is no incentive to conserve natural resources.

Requiring producers and consumers to take account of external costs ("Externalities")

• Regulation-or another form of governmental intervention- can be a means to compel individuals or organizations to take account of external costs or spillover effects, the costs they impose on other people.

Proponents of regualtion contend that many of the rules and directives have yielded numerous benefits to the public.

• The regulatory process generates its own set of "externalities." 
• The very substantial costs and other adverse side effects that government regulation gives rise to, society has begun to take a hard look at the full array of government controls over business.
• The expansion of regulation also has required a variety of changes in the way companies manage their operations

There is little justification for either a general attack by business or other groups on all forms of government regulation or for a blanket endorsement of every instance of government intervention in the economy. Proponents of regulation contend that many of the rules and directives have yielded numerous benefits to the public. The NHTSA claims that seat belts, head restrainted, and other mandated safety devices save thousands of lives each year. 

Source: Business and government in the global marketplace (seventh edition, Murrat L. Weidenbaum)