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Accounting Regulation

In: Business and Management

Submitted By qing0319
Words 1607
Pages 7
Three Theories of Regulation
1: Public interest theory
The central economic rationale for origins of government intervention with public interest theory is that of market failure. Public interest theory assumes that economic markets are subject to a series of market imperfections or transaction failures, which if left uncorrected will result in both inefficient and inequitable outcomes.
2: Regulatory Capture Theory
Capture theory assumes that all members of society are economically rational -and each will pursue his/her self interest to the point where marginal benefit from lobbying regulators just equals private marginal cost. Therefore people lobby for regulations that increase their wealth, or they lobby to ensure that regulations are ineffective in decreasing their wealth.
3: Private Interest Theory
Stigler’s private interest theory – he argues that regulatory activity reflects the relative political power between interest groups. Interaction is with politicians who are not neutral arbiters but are like business executives or consumers - and are thus rationally self interested.
Private interest theories favour producer groups as the most likely to become organised interest groups. Theorists believe that regulation does not arise as a result of a government‘s response to public demands – it is sought by the producer private interest group - and is designed and operated primarily for its benefit.

Normative theories are prescriptive - they prescribe the “best” way to account. Normative theorists advance their own models to improve accounting practice. It focuses on true income (profit) for decision making. The major issue are the impact of changing price environment and the impact on income, assets, liabilities and equity. Normative theories are...

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