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Which of the following best exemplifies regulatory capture, or the capture theory of regulation? a
Which of the following best exemplifies regulatory capture, or the capture theory of regulation?
a. Banks write the laws that will be enacted in an effort to govern the financial industry.
b. A pollution tax is enacted to internalize a negative externality.
c. Both negative and positive externalities are internalized or negated.
d. Homeowners are forced to pay an additional tax in order to support a public park in their area.
e. None of the above.
Expert Solution
- The correct option is a. Banks write the laws that will be enacted in an effort to govern the financial industry.
According to the regulatory capture theory, authorities such as the central bank and parliament often give in to the interest of banks and make policies that favor banks as opposed to the public. Normally, banks and other financial institutions will want to control the authority to advocate for their interests. Hence, the laws formulated by the regulators reflects the wishes of banks.
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