Final answer:
Regulatory capture can result in regulations that benefit regulated firms more than consumers, often leading to reduced competition, higher prices, and limited market entry. Deregulation, while disruptive, can introduce benefits such as increased competition and efficiency.
Step-by-step explanation:
The economic impact of interference with reasonable institutional and behavioral economics (IBE) on the character of regulation, such as through regulatory capture, is significant. Regulatory capture occurs when regulated firms significantly influence the regulations designed to govern them, resulting in regulations that may poorly represent consumer interests and potentially keep prices high by limiting competition. An example of this was seen in the regulation of the airline industry, where airlines had a substantial influence on the regulatory board.
Regulatory capture can lead to a situation where government price regulation becomes a tool for competitors to collude, reduce output, and restrict market entry, thereby harming consumer welfare and stifling innovation. This form of regulation often does not serve the public interest and instead benefits the regulated entities. The effects of deregulation, in contrast, can lead to market disruptions but also bring economic benefits by fostering competition and encouraging efficiency.