Regulated Market Explained, With Pros and Cons

What Is a Regulated Market?

A regulated market is a market over which government bodies or, less commonly, industry or labor groups, exert a level of oversight and control. Market regulation is often controlled by the government and involves determining who can enter the market and the prices they may charge. The government body's primary function in a market economy is to regulate and monitor the financial and economic system.

How a Regulated Market Works

Regulation curtails the freedom of market participants or grants them special privileges. Regulations include rules regarding how goods and services can be marketed; what rights consumers have to demand refunds or replacements; safety standards for products, workplaces, food, and drugs; mitigation of environmental and social impacts; and the level of control a given participant is allowed to assume over a market.

The FDA, SEC, and EPA are examples of U.S. regulatory bodies.

Ancient civilizations imposed rudimentary regulations on markets by standardizing weights and measures and providing punishments for theft and fraud. Since that time, regulations have mostly been imposed by governments, with exceptions: medieval guilds were trade bodies that strictly controlled access to given professions and defined the requirements and standards for practicing those professions. Beginning in the 20th century, labor groups have often played a more or less official role in regulating certain markets.

Examples of regulatory bodies in the U.S. include the Food and Drug Administration, the Securities and Exchange Commission, and the Environmental Protection Agency. These agencies derive their authority and their basic frameworks for regulation from legislation passed by Congress, but they are parts of the executive branch, and the White House appoints their leaders. They are often charged with creating the rules and regulations they enforce, based on the idea that Congress lacks the time, resources, or expertise to write regulation for every agency.

Arguments for and Against Regulated Markets

Supporters of a given regulation—or regulatory regimes in general—tend to cite benefits to the wider society. Examples include limiting mining companies' ability to pollute waterways, banning landlords from discriminating based on race or religion, and granting credit card users the right to dispute charges.

Regulations are not always purely beneficial, however, nor are their rationales always purely altruistic. Labor unions have at times successfully lobbied for regulations granting their members exclusive access to certain jobs, for example. Even well-intentioned regulations can carry unintended consequences. Local-content requirements are often imposed to benefit domestic industry. A government might require that cars or electronics sold in the country contain a certain proportion of locally manufactured components, for example. These rules do not necessarily succeed in nurturing local manufacturing, but often lead to letter-of-the-law workarounds (components made in fully staffed factories elsewhere and assembled by a handful of employees in-country) or black markets.

Some advocates of free markets argue that anything in excess of the most basic regulations is inefficient, costly, and perhaps unfair. Some argue that even modest minimum wages raise unemployment by creating a barrier to entry for low-skilled and young workers, for examples. Advocates of the minimum wage cite historical examples in which highly profitable companies paid wages that did not provide employees with even a basic standard of living, arguing that regulating wages reduces exploitation of vulnerable workers.

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