Discuss the regulation question in terms of determining and meeting the demand for accounting information. Who pays for and who benefits from accounting information?

Question

What will be an ideal response?

Answer 1

ANSWER:
An argument in favor of regulation is that accounting information is a public good, and public goods are underproduced in a free market. Underproduction of public goods occurs because producers are not able to impose production costs on all users of the good, and are thus not motivated to meet real demand. The people who consume public goods without paying for them are called free riders. True market demand for public goods is not revealed in the market place because free riders are able to use the goods at no cost. The only way in which production can be increased is through regulatory intervention. Intervention in the form of mandatory reporting requirements is considered necessary to ensure that the real demand for accounting information is met.

There is another argument that regulated markets result in a tendency for overproduction. This overproduction can be avoided only if a pricing system can be imposed on public goods, creating non-purchasers who are effectively excluded from consuming the good. If accounting information had to be purchased, such as through the SEC’s EDGAR system, there would be incentives for users not to pass on the information to free riders. In this way, real economic demand for information could be determined, and production costs could be recovered from the real users of accounting information. By contrast, the present disclosure system imposes costs on companies rather than on users. One of the negative consequences of regulating accounting is that it results in a wealth transfer from non-users to users of accounting information. A wealth transfer occurs because users receive the benefits of free accounting information while non-users implicitly incur the production costs.