The Transaction Costs Perspective on Costs and Benefits of Government Regulation: Extending the Standard Cost Model

Tinbergen Institute Discussion Paper No. 09-013/3

34 Pages Posted: 20 Feb 2009

See all articles by Frank A. G. den Butter

Frank A. G. den Butter

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Marc de Graaf

affiliation not provided to SSRN

Andre Nijsen

affiliation not provided to SSRN

Date Written: February 18, 2009

Abstract

This paper explores the feasibility to extend the Standard Cost Model (SCM) for calculating the costs of government regulation by taking all transaction costs into account which stem from the principal/agent relationship between regulatory authorities and economic entities. From that perspective these transaction costs do not only relate to the bonding costs of the regulated entities - part of these costs can be regarded as the administrative burden of regulation for the private sector - but also to the monitoring costs of the regulators and to the residual loss. These latter costs can be regarded as cost to society due to e.g. miscommunication on the aims of regulation, and are, of course, hard to quantify. A cost calculation using the (extended) SCM presumes that the regulatory rules are given and set autonomously by the regulatory authorities. However, it may be welfare enhancing if regulations are fashioned in such a way that net benefits are optimized. From that perspective the paper looks at the possibility to select optimal regulation by means of a cost benefit analysis. A major argument is that the benefits of regulatory measures, e.g. to internalize external effects, comprise avoiding societal costs associated with no or less regulation.

Keywords: bonding costs, compliance costs, monitoring costs, welfare effects of government regulation

JEL Classification: Classification-JEL: D73, D78, H11, H83

Suggested Citation

den Butter, Frank A.G. and de Graaf, Marc and Nijsen, Andre, The Transaction Costs Perspective on Costs and Benefits of Government Regulation: Extending the Standard Cost Model (February 18, 2009). Tinbergen Institute Discussion Paper No. 09-013/3, Available at SSRN: https://ssrn.com/abstract=1345789 or http://dx.doi.org/10.2139/ssrn.1345789

Frank A.G. Den Butter (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Marc De Graaf

affiliation not provided to SSRN ( email )

Andre Nijsen

affiliation not provided to SSRN ( email )

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