Private Interest Theory Of Regulation Analysis

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Private Interest Theory of Regulation

The private theory interest of regulation does not consider the public interest at all (Posner 1974). In this theory, interest groups represented by big corporations only seek to maximise profits by exerting pressure on politicians and regulators (M.Martins 2008). Businesses are dictated by supply and demand of their product or service (Posner 1974); therefore, there are conditions when a pharmaceutical company, for example, will accept regulation; namely, the regulation needs to provide government subsidies, easier price fixing, constraints on substitute products (i.e. generics) or the ability to control the entry of new competitors (M.Martins 2008).

With private interest theory, companies take a lot
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Also, these companies have the incentive, resources and opportunity to lobby for a regulation that serves their own interest. An example that demonstrates the private interest in the real world is the sale of the Cystic Fibrosis Foundation’s royalty rights to an investment company for $3.3 billion (Hinkes-Jones 2015). The goal behind government continuous subsidizing of the Cystic Fibrosis Foundation (CFF) is to develop drugs quickly and cheaply (Hinkes-Jones 2015). Instead, the CFF sold the rights to lifesaving research and invested in a stake in Vertex Pharmaceuticals (Hinkes-Jones 2015). Since CFF is a research foundation, it has a tax-exempt status (Hinkes-Jones 2015). The problem arises when the research that was done in collaboration with Vertex utilized the tax exemptions from CFF (Hinkes-Jones 2015). Pharmaceutical companies are able to gain tax exemptions by …show more content…
As per the previous example, governments chose to regulate through inaction; consequently, the CFF gained the upper hand and was able to capitalise on government subsidized research. In this case, government policy was in the sake of private interest.

Rent Seeking

Rent seeking is when companies spend resources in order to own someone else’s surplus. In other words, activities that privilege one group over another (Marotta 2013). Lobbying is a form of rent seeking; specifically, companies hire lobbyists to sway public policy to the benefit of the company (Marotta 2013). Lobbyists do not add value to the market, only to the company they represent (Marotta 2013).

An example of rent-seeking behaviour is in the South African pharmaceutical industry (Papaioannou, et al. 2015). In 1994, the relationship between the South African government and the pharmaceutical industry was very tense. The government tried, on many occasions, to push and control the pharmaceutical companies into cooperation (Papaioannou, et al. 2015). The South African economy revolved around the mining and energy sectors; nevertheless, the government lacked the resources and ability to invest in a broad-based science infrastructure (e.g strong domestic pharmaceutical industry) (Papaioannou, et al.

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