Regulation - Mock 2

CFA Level II
#1

Does regulation frequently result in lower quality? I didn’t get that from the reading but the Mock 2 answers seem to imply that was the correct answer. Is it lower/ better quality? Thanks

#2

Short Term often drop in service quality Long Term drop in prices

#3

Regulation lowers quality, deregulation lowers prices. Deregulation can also have negative side affects in the short run (unemployment)

#4

st increase in unemployment

#5

Think about it this way, when you deregulate an industry it becomes competitive and firms are now profit focused…so they lay off a few workers and service quality decreases. When you are granted a cost plus return by the government it is easy to justify lots of employees, but the dead weight gets trimmed with deregulation - thus the drop in employees AND service quality. In the long term competition drives prices down to marginal cost, thus the lower prices in the long term.

#6

Thanks guys. So if I get this straight, service quality will decrease initially when regulation starts, but in the long-run service quality will increase. When deregulation, service quality should always be lower. I get everything else about price and unemployment.

#7

There is nothing that says service quality will increase in the long term (it is page 461 of the CFAI). The only long term benefit they cite is lower price due to increased competition resulting in firms pricing closer to marginal cost.