A Level Economics AQA Practice Exam

What does regulatory capture refer to in economics?

1. A failure of government to enforce regulations

2. Control of a regulatory agency by the industry it regulates

3. Increased competition among firms

4. A perfect regulatory environment

The correct answer is: Control of a regulatory agency by the industry it regulates

Regulatory capture occurs when a regulatory agency, which is supposed to act in the public interest, instead acts in favor of the industry it regulates. This often happens when the regulated industries exert influence over the agencies responsible for overseeing them. As a result, the regulations developed may favor the interests of these industries, potentially leading to outcomes that are contrary to the interests of the public or consumers. In a situation of regulatory capture, you might find that the agency prioritizes the needs and desires of the industry over effective enforcement or the broader goals of regulation, such as ensuring safety, promoting fairness, or protecting the environment. This underscores the risk of regulatory bodies becoming too closely allied with the industries they monitor, compromising their objectivity and effectiveness.