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Government controls

As well as fiscal, monetary and supply-side policies, a government can use direct controls to help reach its objectives. It can, for instance, pass laws to protect the environment, fine firms that exploit consumers or workers, and set rules to keep up standards in business. Controls like these protect vulnerable people and places, but they can add to firms’ costs and hold back their growth.

Regulation and legislation

Regulation

Regulation: government controls in markets.

Regulations are rules firms must follow, e.g. limits on harmful emissions, bans on certain products or areas closed to traffic. Government agencies check that firms obey them.

Advantages of regulation:

• Limits harm directly: rules can cap the amount of pollution or ban a harmful product outright, which reduces external costs.
• Most people comply: most firms and consumers want to stay within the rules, especially when a rule is popular, so it can work well.
• Raises awareness: a new rule makes people more aware of a problem, which can help prevent similar harm in future.

Disadvantages of regulation:

• Needs enforcing: a rule only works if it is properly policed. Governments may lack the money, staff or commitment to do this.
• Raises firms’ costs: meeting the rules can be expensive, especially for small firms. They may pass the cost on to customers in higher prices, lose business or even close.
• May not solve the problem: a ban rarely stops an activity completely, and the problem may have other causes that the rule does not touch.

Legislation

Legislation: laws passed by the government.

Laws can protect consumers, workers and the environment, and can make markets more competitive. Firms that break them may be fined and made to pay compensation.

Advantages of legislation:

• Protects consumers: e.g. laws stop firms making false claims about their products or selling food that is unsafe to eat or goods that do not work properly.
• Increases competition: e.g. a law that lowers the barriers for new taxi firms gives the public more choice and lower fares.
• Prevents exploitation: laws stop vulnerable groups, such as low-paid workers, being taken advantage of.

Disadvantages of legislation:

• Costs for firms: obeying the law can add to firms’ costs, which may hold back their growth and development.
• Hard to enforce: having a law does not mean firms and people will obey it, and governments may not have the resources to make sure they do.
• Legal battles: large, wealthy multinationals may be prepared to fight the government in court.

Fines and pollution permits

Fines

Fines: Financial penalties imposed on individuals or businesses who break the law.

Advantages of fines:

• A reason to obey the law: a fine cuts a firm’s profits or a person’s income, so it gives them a financial incentive not to break the rules, e.g. drivers who fear a fine will think twice before running a red light.
• The polluter pays: the money raised can be used to clean up damage or to improve public services, e.g. parking fines can help pay for public transport.
• Damages reputation: being fined can harm a firm’s public image, which may put off customers and investors.

Disadvantages of fines:

• Must be large enough: if a fine is small compared with a firm’s profits, it may be cheaper to keep breaking the law and pay. Some firms carry on polluting after being fined many times.
• Slow: it can take years to take a firm to court, so the damage continues in the meantime.
• Needs enforcing: people and firms must be caught before they can be fined.

Pollution permits

Pollution permits: give firms the legal right to discharge a certain amount of polluting material.

The government decides the total amount of pollution allowed and shares it out through permits. Permits can be traded, so a firm that pollutes less than its allowance can sell its spare permits, and a firm that struggles to cut pollution can buy more.

Advantages of pollution permits:

• Caps total pollution: the government controls the overall amount of pollution through the number of permits it issues.
• Uses market incentives: firms that switch to cleaner technology can sell their spare permits, so they have a financial reason to pollute less and can boost their profits.

Disadvantages of pollution permits:

• Hard to set the right number: if the government issues too many permits, pollution will hardly fall. If it issues too few, firms may cut output, and jobs may be lost.
• Hard to measure: pollution is difficult to measure, so firms may cheat and hide how much they really pollute.
• Expensive to run: the cost of managing a permit system is quite high.