A Level Economics AQA Practice Exam

What effect can regulatory capture have on consumer welfare?

1. It generally improves consumer welfare

2. It typically has no impact on consumer welfare

3. It can lead to reduced consumer protection

4. It creates more competition for consumers

The correct answer is: It can lead to reduced consumer protection

Regulatory capture occurs when regulatory agencies, which are meant to act in the public interest, instead begin to act in favor of the industries they are supposed to regulate. This situation arises when the regulated businesses exert influence over the regulators, often leading to policies that benefit those businesses rather than consumers. When regulatory capture takes place, it can lead to reduced consumer protection. For example, regulatory agencies might relax standards for safety or quality, lower inspection frequencies, or allow for higher prices without proper justification. Consequently, consumers may face higher risks, lower quality products, and less competition in the market. This undermines the very purpose of regulation, which is to ensure a fair market environment and protect consumers from exploitation and harm. In contrast, the other options suggest positive outcomes or neutrality for consumer welfare. However, under regulatory capture, the interests of consumers are not prioritized, which directly contradicts the assurances and protections that effective regulation is supposed to provide. Thus, the assertion that regulatory capture can lead to reduced consumer protection aligns accurately with the implications of such a phenomenon.