Page 26 - FINAL CFA II SLIDES JUNE 2019 DAY 4

READING 11: CURRENCY EXCHANGE RATES: UNDERSTANDING EQUILIBRIUM VALUE
LOS 13.c: Describe the economic rationale for
regulatory intervention -2 main reasons!
MODULE 13.1: ECONOMICS OF REGULATION

Informational frictions occur when information is not equally available or distributed (information asymmetry). Regulations are put in place in an attempt to
ensure that no participant is treated unfairly or is at a disadvantage.

Externalities are costs or benefits that affect a party that did not choose to incur that cost or benefit (e.g. provision of public goods). Since people share in
the consumption of public goods but don’t necessarily bear a cost that is proportionate to consumption, regulations are necessary to ensure an optimal
level of production of such public goods.

LOS 13.d: Describe regulatory interdependencies and their effects. …dwells on conflicts a regulator is exposed to..

Regulatory capture theory: regardless of the original purpose behind its establishment, a regulatory body will, at some point in time, be
influenced or even possibly be controlled by the industry that is being regulated (regulators often have experience in the industry, and this
affects the regulators’ ability to render impartial decisions).

Regulatory competition: Due to regulatory differences between jurisdictions, regulators compete to provide the most business-friendly regulatory
environment.

Regulatory arbitrage: occurs when businesses shop for a country that allows a specific behavior rather than changing the behavior. Regulatory
arbitrage also entails exploiting the difference between the economic substance and interpretation of a regulation. To avoid regulatory arbitrage,
cooperation at a global level to achieve a cohesive regulatory framework is necessary. Paris Agreement framework helps?

LOS 13.e: Describe tools of regulatory intervention in markets – 3 Tools!

Price mechanisms: Alter taxes and subsidies to further specific regulatory objectives

Restricting/requiring certain activities: Ban certain activities (e.g., use of specific chemicals) or require that certain activities be performed (e.g.,
filing of 10-k reports by publicly listed companies) to further their objectives.

Provision of public goods or financing of private projects: Provide public goods (e.g., national defense) or fund private projects (e.g., small
business loans) depending on their political priorities and objectives.

………more than one regulatory approach may be possible and desirable!