Tools and theories of economic policy 561government regulates the company’s behavior. Second, politics plays a key role in this
process. An important event in the Microsoft case was the election of a president who
took a less aggressive stance on regulating potential monopolies than his predecessor
had. Recall that Republicans tend to favor a strong role for the free market and
advocate a pro-business perspective, which both require a smaller role for government
regulation, whereas Democrats generally favor more government regulation to protect
the interests of consumers (in the Microsoft case, these interests would have led to a
broader range of options for Internet browsers), the environment, and workers.
The most common market failures that lead to social regulation are negative
externalities: they occur when the costs of a firm’s behavior are not entirely borne by
the firm and are passed on to other people. When this happens, the firm produces more
of an unwanted good than is socially desirable. The classic example is pollution. In a
free market, the owners of a coal-fired power plant do not bear the cost of the pollution
spewing out of its smokestacks. The people who live downwind from the plant bear the
cost. Therefore, the power plant owners have little incentive to curb pollution unless
the government regulates it. Other examples of agencies that set social regulations are
those that promote safety, such as the National Highway Traffic Safety Administration,
the Consumer Product Safety Commission, and the Occupational Safety and Health
Administration. Carbon emissions are another good example of a product (carbon)
that would be overproduced by the market if there were no regulations.
Externalities may also be positive. For example, firms invest in research and
development, but the knowledge and products that come from that R&D may have
broader social benefits (such as developing a new drug that cures a disease). Goods
with positive externalities may be under-produced by the free market unless firms
are given economic incentives to invest in them. One important policy tool to address
positive externalities is a patent. Patents are exclusive “property rights” that are given
for a specific period of time to an inventor or company that develops a new product.
The money to be gained from holding these rights provides an incentive to invest in
developing innovative technology and ideas. In 2015, the U.S. Patent Office granted
325,979 patents of the 629,647 applications it received.^56The Politics of Regulation Regulatory policy also involves interbranch politics
between Congress and the bureaucracy. Even when members of Congress agree on
some general policy goal—for example, limiting air pollution—they often cannot
agree on the precise mechanisms for achieving that goal, so they delegate authority
to a regulatory agency. As discussed in Chapter 13, this produces a “principal–agent
problem” in which Congress (the principal) cannot be sure that the bureaucracy (the
agent) will implement policy according to its legislative goals. A related concern is
that the regulatory agency will not be responsive to the wishes of Congress because
it has been “captured” by the interests it is supposed to regulate (see Chapter 13). The
Food and Drug Administration, the Federal Aviation Administration, and the U.S.
Department of Agriculture, among others, have been accused of serving the very
industries they are supposed to regulate, rather than protecting American consumers.^57
Another area in which regulatory policy has generated some political heat
concerns the trade-off between regulation and economic growth. Regulations
impose costs on the free market, which may limit job growth. The Trump
administration has moved aggressively to limit regulations and allow the free market
to make more decisions. Some of the significant actions to reduce regulation include
pulling out of the Paris Climate Accord, revising the fuel-efficiency regulations
for cars and light trucks (this process is underway), repealing the Clean Power
Plan, opening the Arctic Wildlife Refuge for oil production, dismantling parts of
the Dodd-Frank law to impose fewer regulations on smaller banks, and droppingFull_16_APT_64431_ch15_530-571.indd 561 15/11/18 2:35 PM