Regulation can be defined as the procedure of making rules that govern behavior. The rules can be imposed by the government, self-imposed or other bodies. Majority of regulations affect businesses and are imposed by the government because of market failure. Market failures occur when markets produce too much or too little of certain products, fail to distribute and produce products or services efficiently, imperfect competition such as market dominance and monopolies. In addition, market failures can occur in instances when the prices of goods or services do not reflect the full cost to society such as pollution. Market failure sometimes can be self-corrected so does not always guarantee regulation. Regulations can be controls on market entries, development approvals, and employment, environmental such as pollution, prices or salaries. Government regulation affects the economy and its purpose is to promote social and economic benefits that cannot occur logically in a pure market. The benefits of regulation, however, incur costs such as regulation of drugs may prevent distribution of drugs with harmful effects, but it may also limit and delay the release of lifesaving drugs in the market (Hood, Rothstein, Baldwin & Oxford University Press 2001).
Government regulation is the most preferred perspective by the people. The regulation of food quality is becoming indispensable since there is a growing concern about some characteristics of food such as nutritional content, freshness and purity. The obvious effect of product quality regulation is to increase the value of products. This is frequently accompanied with the increase of the market price of the product because of increase in marginal cost of production. Some regulation such as prohibition in use of pesticides in farms improves both the environment and safety of fruits and vegetables for consumption (Hood, Rothstein, Baldwin& Oxford University Press 2001).
Government regulation of markets comprises alternative methods of allocation and distribution of resources. It may also provide a basis of exchange that is less costly than common law. Regulation of financial markets by the government helps investors to be fully informed of the markets and also eliminates fraud and manipulation of the markets. In an unregulated market, investors may not have adequate information to guide them when carrying out investments. Furthermore, fraud and manipulation robs investors of a fair return of their investments and consequently affects the entire economy (Hood, Rothstein, Baldwin & Oxford University Press 2001).
Hood, C., Rothstein, H., Baldwin, R., & Oxford University Press. (2001). The government of risk: Understanding risk regulation regimes. Oxford: Oxford University Press.
