Question #12
Reading: Reading 7 Economics of Regulation
PDF File: Reading 7 Economics of Regulation.pdf
Page: 5
Status: Unattempted
Question
Regulations are least likely needed under which of the following situations:
Answer Choices:
A. A small town is experiencing large inflow of out-of- town visitors constraining street parking
B. A small privately-held developing ‘Apps’ seeks equity investors to finance development of additional software
Explanation
Regulations are needed in the presence of information asymmetry externalities, weak
competition, and social objectives. A privately held company seeking new equity investors
would be in a situation where the company insiders have better quality information than
the investors (i.e., information asymmetry). Street parking is a public good (i.e., an
externality) which needs to be regulated for its optimal production and allocation.
Incorrect growth estimates are subjective and not due to information asymmetry and
hence would not be a valid justification for regulations.