Attempts by government to achieve the potential cost advantages of natural monopoly while avoiding allocative and technical inefficiency, to encourage competitive rivalry whilst discouraging too dominant a winner, to achieve the advantages of sophisticated forms of contracting whilst avoiding the associated possibility of (to quote Adam Smith) ‘a conspiracy to defraud the public’, have resulted in a complex web of regulations and legislation. In each area we have seen that business is involved in a perpetual stream of negotiations with the government or its agents. The outcomes are not easily predictable, but at each stage certain common factors are important. The objectives of the parties concerned, the courses of action available to them, the system of rewards and penalties which faces them, the information available to them, and the costs of monitoring behaviour or discovering other relevant information – these factors define the structure of the complex game in which the participants are engaged. In Module 4 we will consider how similar considerations play a part in the regulation of other economic activities.
