Theories of economic regulation
Richard A. Posner
Professor of Law
University of Chicago
and Senior Research Associate
National Bureau of Economic Research
Several theories have been advanced to explain the observed pattern
of government regulation of the economy. These include the
"puiblic interest" theory and several versions, proposed either by
political scientists or by economists, of the "interest group" or
"capture" theory. This article analyzes those theories. It argues that
the public interest heory and the political scientists' versions of the
interest group theory are unacceptable in their present form. The
economists' version of the interest group theory is discussed at
greatest length, its theoretical and empirical foundations are re-
viewed, and the conclusion is reached that, while promising, the
theory requires both more analytical development and new sorts
of empirical investigation before it can be accepted as an adequate
positive theory of regulation.
1. Introduction * A major challenge to social theory is to explain the pattern of
government intervention in the market-what we may call "eco-
nomic regulation." Properly defined, the term refers to taxes and
subsidies of all sorts as well as to explicit legislative and admin-
istrative controls over rates, entry, and other facets of economic
activity. Two main theories of economic regulation have been
proposed. One is the "public interest" theory, bequeathed by a
previous generation of economists to the present generation of
lawyers.1 This theory holds that regulation is supplied in response
to the demand of the public for the correction of inefficient or
inequitable market practices. It has a number of deficiencies that
we shall discuss. The second theory is the "capture" theory-a poor
term but one that will do for now. Espoused by an odd mixture
of welfare state liberals, muckrakers, Marxists, and free-market
economists, this theory holds that regulation is supplied in response
Richard A. Posner received the A.B. from Yale University in 1959 and
the LL.B. from Harvard University in 1962. His current research centers on
the use of economic analysis to explain the behavior of the legal system.
The author wishes to thank Gary S. Becker, Ronald H. Coase, Paul W.
MacAvoy, B. Peter Pashigian, and George J. Stigler for their helpful com-
ments on an earlier draft.
This paper was originally given at a conference on regulation sponsored
by the National Bureau of Economic Research, and is part of a series of
studies in the area of law and economics being carried out by the Bureau
under a grant from the National Science Foundation. It is not an official
Bureau publication, since it has not yet undergone the full critical review
accorded National Bureau publications, including approval by the Bureau's
board of directors.
For an appendix to this article, see George Stigler's "Free Riders and
Collective Action," pp. 359-365 in this issue.
1 The theory is more often assumed than articulated. Some representa-
tive works embodying it are Bonbright [4], Davis [9], and Friendly [13].
THEORIES OF ECONOMIC
REGULATION / 335