Question

Why does regulatory capture reduce the persuasiveness of the case for regulating industries for the benefit of consumers?

Short answer

It leads to the establishment of self-interested monopolies.

Step-by-step solution

Step1. Introduction

Regulatory capture occurs when a regulator designed to protect the public interest becomes a lobbyist for the firms that are meant to be enforcing those regulations.

Step2. Explanation

Regulatory capture is a type of failure on the part of the government. A regulator has been established to oversee initiatives that are in the public interest. However, when a regulator considers political and corporate considerations instead of the public interest, society suffers a net loss. It inevitably leads to the formation of monopolies, which impose exorbitant prices for limited quality and quantity.

It is a circumstance in which a company that is expected to obey regulations creates those rules. In this example, the firm makes restrictions in its own self-interest, worsening the situation for the general good.