Government Regulation of Businesses


Government generally regulates business for one of two fundamental reasons. First are industries in which market forces do not provide competition and therefore risk high prices. This is especially a concern with regard to industries that sell necessities, like utilities. Second are areas in which public policy is so important that allowing certain business behaviors to go unchecked would be too harmful to the public. Examples of this are environmental regulations and regulations on marketing.

Natural Monopolies

A natural monopoly exists when the most efficient way for goods or services to be produced is by a single supplier. In a natural monopoly, the existence of multiple providers causes the costs to produce the product to increase, making a competitive market inefficient. In these instances, government often regulates the natural monopoly in order to ensure that the public is charged a fair price.

Examples of Industries Sometimes Considered Natural Monopolies

Utilities were historically considered natural monopolies, though this view has softened considerably in recent years. The general idea was that because utilities require so much infrastructure and capital investment, there was no need for multiple companies to own separate sets of power lines in order to provide utility service. This concept is far less absolute than it was considered 30 years ago, and many aspects of the utility industry have been opened to competition.

Regulation Based in Public Necessity

Other forms of regulation are necessary to police activities that are harmful to the community at large. This form of regulation can transcend many forms of industry. For example, an environmental regulator may regulate discharges into a river with more concern for the type of discharge than the type of industry causing the discharge.

Federal Versus State Regulation

Things that touch and concern interstate activities tend to be federally regulated. For example, historically, long-distance telephone service was a FCC issue whereas local telephone service was a state utility commission issue. This distinction is far from absolute, and there are many instances where state and federal regulation coexist on the same issue. For example, most states have an environmental agency that works in conjunction with the EPA.


Beginning in the 1960s, arguments began for the deregulation of several major industries. In the 1970s, the federal government began deregulating the airline industry, to what has been generally considered successful results. Since deregulation, competition in the industry grew fierce and prices dropped. Similarly, the telecommunications industry began the deregulation process in the mid 1990s with the Federal Telecommunications Act of 1996. Prices for long-distance calls and the advancement of new technologies are sometimes attributed in part to deregulation. Electricity markets in many parts of the world also have been deregulated, though the results have sometimes been considered mixed. Naysayers often point to failure of the California market in the early 2000s.

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