Regulatory capture
Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
Regulatory capture happens when a regulator ends up serving the industry it regulates instead of the public. George Stigler described it in 1971. It is one cause of government failure. Capture can happen for several reasons:
- the industry is small, organised and has a lot at stake, while consumers are many and scattered;
- regulators depend on the industry for information;
- officials may hope for industry jobs later.
Example
Suppose a sector regulator sets tariffs mostly from data given by the firms, holds consultations where only the companies speak up, and approves every price rise they ask for. Consumers then pay monopoly-like prices even though a "watchdog" exists.
Don't confuse with
- Rent seeking: this is the lobbying activity itself, the spending of effort to win favours from policy. Regulatory capture is one result it can produce: a regulator that has been taken over.