4IpaUJbnm

Nevertheless, misleading advertising is ubiquitous because of loopholes in regulations.
Hattori and Higashida (2012) identified the different policies for regulating misleading
advertising:
1. Taxing misleading advertising as an optimal regulation
2. Complete prohibition of misleading advertising (For example, the complete prohibition
corresponds to the case where some regulatory agencies, such as the FDA and FTC,
regulate false or misleading advertising with very strict standards.)
3. Educating consumers
4. It’s important that government policy not only educate naive customers, but also smart
customers because it reduces misleading advertising, which, in turn, lowers the
equilibrium price of a product.
5. Taxing production
6. The policies for prohibiting misleading advertising could consider and taxing production
are more likely to reduce welfare when the degree of product homogeneity is high
and/or the magnitude of advertising costs is large.
7. Prohibiting cooperative and misleading advertising.
The main reason prohibiting misleading and comparative advertising is because it may affect
thousands of businesses worldwide. The distortion of businesses economic decision-making
also gives rise to distortions of competition. In addition, misleading and comparative
advertising practices have a knock-on effect on customers as they have to pay more for
products and services. Misleading advertising regulation should include the obligation to
introduce the possibility of legal action against non-compliant advertising, granting courts
powers to order cessation or prohibition of such advertising and enabling them to require
the advertiser to furnish evidence as to the accuracy of factual claims in advertising
(Directive 2006/114/EC).
Arai (2013) findings show that where related customers or customers who intend to buy
don’t care about their understanding of advertising, a situation of moral hazard may arise.
However, research show that consumers trust by their own opinion and understand all
advertising. It has showed how important it is to educate customers.
In order to safeguard customers against misleading conduct and deception about the
qualities, designation etc. of foods, the consumer merely has to be in a position to make the
decision to buy on the basis of criteria he or she considers crucial. This can be enabled by
appropriate labelling indicating the type of product sold and including information about its
qualities (Meisterernst, 2013).
When misleading advertising leads customers to buy products that they would not have
otherwise purchased, it seems reasonable that the government should strictly prohibit such
advertising. However, when a product market is imperfectly competitive, there is the
problem of under-consumption of products, which implies that a certain amount of
misinformation may increase consumption and improve social welfare (Hattori and
Higashida, 2012).
Research studies have showed that misleading advertising regulations could protect not
only customers, but also small business, because advertising has a strong economic impact
199