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Regulatory Policy

In addition to fiscal and monetary policies, a government affects the economy through regulatory policy, which aims to limit what can be done in the marketplace. Most governments have some regulations covering a variety of areas, including:

  • Banking, insurance, and other financial businesses
  • Safety
  • Environmental impact
  • Minimum wages

Example: In the United States, several government agencies and independent organizations regulate the market. The Federal Reserve Bank, for example, has some power over regulatory policy because the Fed tells banks how much actual cash must be kept in each bank (this is called the reserve rate). The Occupational Health and Safety Administration regulates workplace conditions to prevent injury. And the Environmental Protection Agency imposes limits on toxic emissions.

Overregulation and Deregulation

Sometimes the government does not do a good job of regulating. An excess of regulation leads to overregulation. Over- regulation can hurt businesses and creates inefficiencies. Governments usually overregulate out of a desire to increase equity or promote social justice.

A lack of regulation leads to deregulation, or a push to repeal or reduce regulations. Deregulation usually occurs in the name of boosting economic efficiency. Although it can increase competition, deregulation can sometimes lead to chaos and hurt consumers.

Example: The commercial airline industry in the United States was deregulated in the 1970s and 1980s. In general, this deregulation resulted in lower prices and more choices for consumers. But many airlines now perpetually hover on the brink of bankruptcy.


Codetermination is a policy used in some states with strong social democratic parties. Derived in Germany after World War II, codetermination forces large corporations to have substantial representation from the workers on the board of directors. Because workers have direct input into corporate policy, the relationship between workers and management often improves. There have been few labor strikes in Germany as a result.