444 CHAPTER 14|ECONOMIC AND SOCIAL POLICY
without good reason—Congress could amend the Federal Reserve Act and remove
the Fed’s responsibility or autonomy in specifi c areas. The Fed must report to Con-
gress annually on its activities and to the banking committees of Congress twice
a year on its plans for monetary policy. The Fed’s annual report is subject to an
outside audit. Fed offi cials also frequently testify before Congress on a range of
issues. And Congress may publicly criticize the Fed when it disagrees with the
Fed’s policies.REGULATORY POLICY
Government regulation has a huge impact on the economy. For example, the fed-
eral government regulates the quality of food and water, the safety of workplaces
and airspaces, and the integrity of the banking and fi nance system. In general, reg-
ulations address market failures such as monopolies and imperfect information
(discussed later). There are two main types of regulation: economic and social.
Economic regulation sets prices or conditions on entry of fi rms into an industry,
whereas social regulation addresses issues of quality and safety.^23 Both types
infl uence the economy.
A common type of economic regulation involves price regulation of monopo-
lies. A monopoly occurs when a single fi rm controls the entire market for a product
so it is not subject to competition. When this happens, the monopoly could charge
extremely high prices if the government did not regulate it. Concern about this
type of behavior led to the Interstate Commerce Act (1887), which created the
Interstate Commerce Commission to regulate railroad rates, and the Sherman
Antitrust Act (1890), which served to break up Standard Oil in 1910, among other
monopolies. More common than a true monopoly are fi rms that control most of a
market rather than all of it and start acting like a monopoly. For example, Micro-
soft was sued by the Justice Department and 19 states in 1998 for trying to quash
its competition in the rapidly growing area of Internet browsers.
The most common market failures that lead to social regulation occur in situa-
tions when the costs of a fi rm’s behavior are not entirely borne by the fi rm but are
passed on to other people. The classic example is pollution. In a free market, the
owners of a coal-fi red power plant do not bear the cost of the pollution spewing
out of its smokestacks; instead, 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 Traffi c
Safety Administration, the Consumer Product Safety Commission, and the Occu-
pational Safety and Health Administration.
Social regulation has generally received strong political support since the
1960s and 1970s, but Congress has pared back economic regulation in the past
30 years. (One exception is in the fi nancial sector, for which regulations were
strengthened in 2010.) Regulatory policy also involves interbranch politics between
Congress and the bureaucracy. Even when members of Congress agree on a gen-
eral 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 11, 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 goals. Another area in which
regulatory policy has generated political heat concerns the debate about the
trade-off between regulation and economic growth. Regulations impose costs
on the free market, which may limit job growth. However, in recent years new