Nature and Relevance Of Regulation:

Government regulation in an economy has been quite varied depending upon the nature of commodity or activity in question and prevailing business environment. Basically there are two types of policies that the government follows:

i) command and control measures, and
ii) market-based incentives.

In command and control measures there is a uniform yardstick for all economic agents.

Government regulation on pricing by monopoly firms could be effected through the government administration directly or there could be a separate regulatory body established for the purpose. We will discuss on the policy instruments available to the government on price fixation of monopoly products in the next section. Here we discuss another form of government intervention in the market which is not necessarily a measure against control of monopoly power. We point to the 'price smoothing mechanism' by the government. Sharp fluctuations in prices of essential commodities can have a greater impact on the economy. In order to avoid sharp and abrupt fluctuations in prices the government intervenes in the market by selling or purchasing the commodity. Alternatively the government can issue guidelines to firms and specify the range within which price can change. The objective is to reach the market determined equilibrium prices, but in a gradual manner.