Regulations are rules that are created and implemented to ensure an efficient distribution of goods and services.
1. Price and Quantity Regulations.
a. Price Regulations are mainly used against monopolistic firms to prevent them from pursuing rent-maximizing prices and creating scarcity.
i. Price caps are a method of price regulation that set a temporary price for a natural monopoly to charge and lower that price as the regulator believes the monopoly can innovate as time passes.
b. Quantity Regulations are used when the scope of an externality may be to great to contain by price, such as car emissions.
i. If firms producing products that have negative, relatively uncontainable externalities, quantity regulations such as emission standards can be implemented to prevent further damage. This is also a way of creating an incentive for firms to innovate.
2. Direct and Indirect Information Provisions
a. Direct Information Provisions are explicit attempts by governments and private agencies to present information to consumers in an attempt to avoid asymmetric information.
b. Indirect Information Provisions are implicit attempts to address asymmetric information problems when direct attempts are not possible due to quality perceptions.
i. One of the approaches the authors examine is licensing to convey quality.
1. Some of the problems associated with licensing are problems with relevant training, a lax in training innovations, and restrictions on low-priced and low-quality alternatives