Which of the following would be the best example of regulatory capture?

• A. A city government subsidizes public transportation to reduce traffic congestion.
• B. A government imposes a tax on firms that pollute the environment.
• C. A public campaign encourages consumers to reduce energy consumption.
• D. A government agency sets industry standards based on recommendations from the largest firms in the industry.

Answer: (D)

Verified step by step guidance

1. Understand the concept of regulatory capture: it occurs when a regulatory agency, created to act in the public's interest, instead advances the commercial or special interests of the industry it is supposed to regulate.
2. Analyze each option to see if the regulatory body is influenced or controlled by the industry it regulates, rather than acting independently for the public good.
3. Option 1 (city government subsidizes public transportation) is a public policy aimed at reducing congestion, not an example of regulatory capture.
4. Option 2 (government imposes a tax on polluting firms) is a regulatory action designed to correct externalities, showing government acting in public interest.
5. Option 3 (public campaign to reduce energy consumption) is an informational effort, not regulatory capture.
6. Option 4 (government agency sets industry standards based on recommendations from the largest firms) shows the regulatory agency being influenced by the industry it regulates, which is a classic example of regulatory capture.