Regulatory mismanagement

Although the public interest theory does have some valid arguments, it would be rather simple-minded to accept this as the basis for governmental reliance on regulation. To do so would mean turning a blind eye to the significant influences of lobbyists mounting pressure campaigns on behalf of various interest groups. In fact, its argument has been reformed and now acknowledges that in fact, market failure is sustained since it is questionable whether the new instruments of regulation, the independent regulators are equipped and empowered to interpret and act in the public interest (regulatory mismanagement).

It makes no sense that regulation is solely a response to market failure, when it sustains it! The "interest group" or "capture" theory – a more realistic approach, looks at political pressure from producer groups and supports the title statement. This theory reveals that regulation is not strongly correlated with the existence of market failures. It opposes the normative analysis as a positive theory with evidence form theoretical and empirical research by Richard Posner (1974), which confirms that regulation is not positively correlated with the presence of external economies or diseconomies or with monopolistic market structure.

vii The "capture group" theory is more convincing because it incorporates the ideas of regulatory mismanagement and the lobbying of interest groups for regulation. It states that interest groups capture the regulatory process and pressure it to work in their favour. Since the government has the power to coerce, they can convince it to use it's power to benefit their well being and maximise their utility. This provides evidence that regulation is supplied in response to demand of interest groups acting to maximise their benefits.

Basically, each interest group representing the public as a whole has a lot at stake. However, any one person has only a very small stake and so has little incentive to invest resources in affecting the regulatory process and free riding is prevalent. On the other hand, there are few firms relative to overall public, decreasing the cost of organising and gathering support. Besides they have more at stake financially than the individual. Firms therefore have more incentive and the opportunity to successfully invest resources in seeking rent preferably as a group. They are therefore the most powerful group.