Question

Explain how regulatory lag can lead to a regulated firm operating in ways and under conditions that both the firm and the regulatory body might not desire.

Answer 1

Regulatory bodies check monopoly power in the market or exploitation of consumers due to monopolization of a product . Regulatory lags can allow a firm to operate at monopoly prices for a longer period of time . It can also allow price discrimination in the market . It is very undesirable by the regulatory body . Also due to such lags other smaller firms might face tough competition from a large firm which can drive them out of business . So it is undesirable for firms too .