Mentor’s Comment:

The question is very simple and asking us to explain the role of regulatory commissions and the issues in its functioning. Introduction should explain about the regulatory commission in general which is a part of the executive branch of government.

Further, explain about its functions. In general it functions on three sets fo justifications: prevention of market failure, restriction or removal of anti-competitive practices and promotion of public interests.

Further, explain about each set of justification and how regulatory commission protects consumers’ interests.

Next, bring example of some regulatory commissions. And conclude based on the points of main body.

 

Model Answer:

Introduction:

Regulatory Commissions are usually a part of the executive branch of the government having statutory authority to perform their functions with oversight from the legislative branch. The commission is generally setup to enforce standards and safety or to oversee use of public goods and regulate commerce.

How it functions:

• There are three set of justifications for regulatory interventions – prevention of market failures, restriction and/or removal of anti-competitive practices and promotion of public interests.
• Market failure is a condition in which the market mechanism fails to allocate resources efficiently to maximize social welfare. In such cases, regulation may be necessary to protect consumer interests. In doing so, regulation might bar the entry of new firms into the sector and protect the monopoly status of the incumbent operators. For eg: Water distribution and Railway lines.

In India because of the adoption of regulatory reforms, rising demand and fixed cost reducing technology, telecom is no longer a natural monopoly. The electricity sector was originally a bundled monopoly but unbundling has led to the introduction of competitions in certain segments. Two segments, transmission and distribution are a still natural monopoly and completely controlled by the government.

Asymmetric information is a situation where one party to a transaction knows more about the product than others. This prevents the market mechanisms from achieving an efficient allocation of resources. For example: A patient at a clinic known less about his ailment and necessary treatment than his doctor, a situation the later can manipulate to his advantage. This creates a role for regulation of market transactions or provision of information by a third party to remove or minimize information asymmetries.