Public interest theory

The Public Interest Theory of regulation explains in general terms, that regulation seeks the protection and benefit of the public at large; public interest can be further described as the best possible allocation of scarce resources for individual and collective goods. Regulation means the employment of legal instruments for the implementation of socio-economic policy objectives, for example the government can establish economic and social regulations in order to realize goals like allocative efficiency, stabilization, or fair and just income distributionWe test the public interest and regulatory capture hypotheses, in the context of the Swedish electricity market, by studying the factors influencing the Swedish Energy Agency’s decision to replace decision-makers it employs to hear customer complaints against utilities.We test if the regulator’s decision to retain, or replace, the decision-maker, following a sequence of decisions, can be explained by whether the customer or utility is being favored by the civil servant. Based on whether the regulator replaces the decision maker that it has the power to appoint, we draw inferences about what theory can best explain the behavior of the regulator. The regulator can choose to favor the customer. To do so would be consistent with the fact that the primary objective of the electricity market reform in 1996 was to put the onus on the Swedish Energy Agency to provide stronger consumer protection against market abuse by the electricity utilities. On the other hand, the regulator might be captured because the utilities have more financial and legal resources and they have a well-established lobby organization which the customers do not have. It is not clear, therefore, whether customers or utilities have benefited most during the post-reform regulation. The Public Interest Theory of regulation explains in general terms, that regulation seeks the protection and benefit of the public at large; public interest can be further described as the best possible allocation of scarce resources for individual and collective goods. Regulation means the employment of legal instruments for the implementation of socio-economic policy objectives, for example the government can establish economic and social regulations in order to realize goals like allocative efficiency, stabilization, or fair and just income distribution In modern economies, the allocation of scarce resources is mainly coordinated by the market. In theory, this allocation of resources is optimal, but these conditions are frequently not complied in practice. The allocation of resources is not optimal and there is need for methods for improving the allocation. One of the methods for achieving efficiency in the allocation of resources is government regulation. According to public interest theory, government regulation is the instrument for overcoming the disadvantages of imperfect competition, unbalanced market operation, missing markets and undesirable market results. Regulation can improve the allocation by facilitating, maintaining, or imitating market operation. The exchange of goods and production factors in markets assumes the definition, allocation and assertion of individual property rights and freedom to contract. Public Interest Theory is a part of welfare economics and emphasizes that regulation should maximize social welfare and that regulation is the result of a cost/benefit analysis done to determine if the cost to improve the operation of the market outweighs the amount of increased social welfare.