Private regulation versus government regulation: the example of financial markets

Economists generally study financial regulation in a ‘market failure’ context. Market failures, as defined in undergraduate textbooks, are identified and government action is proposed to remedy those failures. Quite apart from objections to the market-failure model that can come from many perspectives, this approach ignores the ways in which regulatory institutions can develop within financial markets. Indeed, such institutions were the norm in the UK until the mid-1980s, and they still exist today. This article proposes that economists should take this observed reality into account. When considering the appropriateness of government intervention, they should first study the relative advantages and disadvantages of private and government regulation.