Regulatory capture, according to Wikipedia, occurs when “a state regulatory agency created to act in the public interest instead advances the commercial or special interests that dominate the industry or sector it is charged with regulating.” In other words, regulatory capture is a fancy economic term for letting the foxes run the henhouse.
The term “regulatory capture” is thrown around a lot when discussing the banking crisis and financial sector regulation because there is a (likely justified) concern that financial institutions have enough influence over regulators that said regulators will avoid enacting laws that would potentially reduce their profits, even if such laws are in the public interest. Regulatory capture generally becomes a concern when potential legislation would hurt a small group of constituents a lot and benefit a much larger group of constituents a little, or vice versa. The reasoning is that people tend to not focus on things that only confer small benefits or costs, so special-interest groups can often get their way without a massive public outcry.
In the banking case, regulatory capture potentially reduces the amount of regulation in an industry, but it’s worth noting that regulatory capture can lead to increased regulation as well. (think agricultural subsidies) Apparently this concept is more widespread than economists realized:
From The Borowitz Report:
WASHINGTON (The Borowitz Report) – In a shocking revelation gleaned from computers seized in his compound in Pakistan, Osama bin Laden spent millions of dollars investing in a company that makes 3-ounce bottles of liquid and gels.
According to CIA director Leon Panetta, Mr. bin Laden’s fervor for investing in the tiny bottle company, Trav-L-Size Inc., may have dwarfed his passion for jihad.
“We haven’t found anything in the computers that indicate Osama bin Laden wanted to rule the world,” Mr. Panetta said. “However, it is clear that he wanted to corner the market in 3-ounce bottles.”
Technically, bin Laden’s terrorist activities would in fact fall under the heading of “taking steps to get favorable legislation passed” if the above were true. Thus, it wouldn’t surprise me if bin Laden also invested in whatever company makes the ridiculously expensive body scanners. On a related note, what are the insider trading implications of this?