Skip to content

IAI Actuarial Core Principles · Business Economics · Government intervention in a market

Which of the following is the best example of 'regulatory capture' as a form of government failure?

Regulatory capture is when a regulator ends up serving the interests of the industry it is meant to control, often through close relationships and dependence on industry information, rather than protecting consumers or the wider public interest.

  1. AA regulator sets a price cap that creates a shortage
  2. BA regulator's decisions increasingly favour the industry it oversees because of close ties and information dependenceCorrect
  3. CA government fails to collect enough tax revenue to fund regulation
  4. DA quota is evaded through smuggling
  5. A regulator imposes costs on firms that exceed the benefits to society

Explanation

Regulatory capture occurs when the regulator acts in the interests of the regulated industry rather than the public, often through reliance on industry information or staff moving between the two. The other options describe different problems such as unintended consequences, evasion or excessive cost.

Did you get it right without looking?

One question tells you little. A timed set on Government intervention in a market shows your real accuracy, how long you take and where you lose marks.

Practise Government intervention in a marketFree diagnostic mock

More Government intervention in a market questions