Agency cost is examined to illustrate how administrative agencies develop. The State is so large that it assigns some of its duties to an agency, but then costs are incurred by the State in monitoring the activities of the agent and by assigning the duties to a public entity rather than allowing the private sector to handle the duties more efficiently. These costs are respectively called monitoring expenditures and residual loss. The thesis of this article holds that administrative law has developed to reduce to an optimal level the agency costs associated with the appointment of public officials to perform duties for the benefit of the public. Judges' incentives are examined with emphasis placed on their desire to remove temptation from the agencies. On the other hand, the judge can err in determining the public interest and may create added costs by imposing rules on agencies that could efficiently serve the public without the court's intervention. Political versus industrial cost is examined to compare the public example with that of the corporation. Different substantive rules and procedural rules are examined in light of their effect on agency-cost with the determination that administrative rules must not be developed based on political decisions regarding the size or intrusiveness of government. Such rules should be developed that minimize agency cost while maintaining the agent's accountability to the principal, namely the public. 127 footnotes.