Question #1
Reading: Reading 7 Economics of Regulation
PDF File: Reading 7 Economics of Regulation.pdf
Page: 1
Status: Unattempted
Correct Answer: A
Question
After a recent financial crisis, Ruritania and all of its neighbors except one voted to enact stringent regulations prohibiting 100% mortgage loans. (A 100% mortgage is one where the borrower receives a loan amount equal to the total value of the property.) The Ruritanian government is now concerned that firms may leave Ruritania and base themselves in a country without the stringent regulation. This situation is best described as an example of:
Answer Choices:
A. regulatory arbitrage
B. regulatory capture
C. regulatory burden
Explanation
When a company chooses to relocate to a new jurisdiction to avoid regulation, this is an
example of regulatory arbitrage. Regulatory capture leads to regulation intended to
enhance the interests of regulated entities. Regulatory burden refers to the costs of
regulation for the entity being regulated.