Assessing the Need for Regulation

Assessing the Need for Regulation

David C. Elliott

1997

Contents

Introduction

Why regulate?

Traditional regulatory models

Questions to challenge regulatory schemes

Alternative to regulating

The cost of regulating

Cost/benefit analysis

Summing up

Introduction

[This one-of-a-series of commentaries on Regulatory Reformation suggests ways to assess whether a regulation is the most appropriate response to a problem.]

Regulation today is pervasive. Hardly any activity is untouched by government regulation.

Governments throughout Canada face a regulatory challenge. Poor regulatory practices cause public cynicism, fail to meet policy objectives, result in non-compliance, impose unnecessary bureaucratic requirements, and impose unnecessary costs for both the regulated and the regulator.

Good regulations takes time, thought, and usually some form of consultation aimed at reaching consensus. All three of these elements are in short supply. As a 1992 Canadian House of Commons Finance Committee described it, regulation is not necessarily bad, but too often we have bad regulation.

In this series of commentaries on Regulatory Reformation "regulation" is used in the broad sense of a law directing or prohibiting conduct or action whether the law be in the form of an Act, regulation, bylaw, or rule.

Other commentaries in the Regulatory Reformation series are

Designing Effective Regulations
Enforcing Regulatory Schemes
Preparing Drafting Instructions for Legislation

The commentaries are available, free of charge, from:

David C Elliott
Legislative Drafting Services

Email:

Why Regulate?

When an undesirable consequence occurs or is foreseen, a government will intervene with a regulation if it believes that, left alone, at least some people could not or would not behave in a desirable way. The government may act on its own initiative or in response to other influences. While there are other reasons for regulating, this is the primary one.

In preparing to regulate, often little disciplined thought is given to:

alternatives to regulation,
the cost as well as the benefit of regulating, and
the best design of the regulation to make it efficient, effective, fair, and user friendly.

Traditional Regulatory Models

Traditional regulatory models impose rules on society, or a sector of it, and establish an inspectorate to investigate contravention's of the rules, correct wrongdoing, and prosecute contravention's through the courts. Canada has many examples of this regulatory model.

The traditional regulatory structure:

relies on outdated assumptions about control of behaviour – detailed rules attempt to implement strict control, with penalties for contravention,
creates a tight and often inflexible framework of bureaucratic control over the regulated sector,
may not impose standards of accountability on the inspectorate or an obligation to maintain competence, and
assumes government inspectors can enforce the regulation.

Research in North American and overseas has shown how ineffective and inefficient the traditional regulatory model can be. An example illustrates:

Regulating traffic
The underlying reason for controlling traffic is to make highways safe for people and property. The regulatory regime to achieve that objective was first to prescribe rules of the road and to enforce them by policing. The result – clogged courts and increasing carnage on highways. The traditional regulatory regime of punishing people for not following the rules did not work.
Other regulatory schemes were then tried to improve highway safety. Those schemes included:

the cumulative point system ultimately resulting in loss of driving privileges,
requiring seat belt use, and
reducing driver's and license plate fees for a good driving record.

This regulatory response, combined with an array of educational initiatives, proved considerably more effective than pure policing.

The regulating traffic example illustrates a transition from a pure policing style of regulatory control to a system encouraging positive compliance. Innovative regulatory responses concentrated on meeting the basic policy objective of highway safety in the most effective way.

Regulatory schemes are more effective when

at least some elements of the scheme contain compliance incentives,
the incentives are designed to achieve the underlying policy objective of the regulation,
the regulatory initiative is combined with an educational or informational program, and
the regulation is well written.

Questions to challenge regulatory schemes

Every proposed regulatory scheme should face the challenge of these questions:

What is the underlying problem needing government intervention?
What is the principal policy objective?
How can the policy objective best be achieved?

Too often, regulations are designed and enacted without thoroughly analyzing these fundamental questions. Without knowing the answers to the first two questions, it is impossible to properly consider the third.

And to these questions must be added questions about the social and economic impact of regulating: does the cost of regulating outweigh the benefits?

Alternative to regulating

Making new law is only one way to achieve policy objectives. Behaviour can be influenced by simply talking, changing administrative processes, changing financial, tax or other incentives, or by public pressure. Each option needs to be explored before creating a regulatory regime.

The cost of regulating

While the benefits of regulation tend to be visible and known, the costs of regulating are often hidden or underestimated. Regulatory costs are usually reflected in higher prices for goods and services, or higher taxes or user fees.

The House of Commons Standing Committee on Finance Report in 1992 distinguished between two types of regulation that can reduce economic productivity and discourage industry innovation. The first is regulation intended to remedy a perceived market failure, but which either does not do so or does so at an excessive cost. Alternatively, the regulatory remedy may result in a cost that exceeds the benefits resulting from the regulation.

The cost of a regulation is not, of itself, evidence of any problem. The relevant questions are:

Does the benefit of the regulation exceed its cost?
Can the cost be reduced?

If economic benefits exceed the cost, the regulation in question increases productivity. If benefits do not exceed the cost, competitiveness demands a change in the regulatory regime, although competitiveness alone is not the only criterion on which to judge whether a regulatory change is needed.

Cost/benefit analysis

There are embryonic methods of estimating the cost and benefit of regulating. In their most basic terms, the analysis entails:

estimating all significant effects of a proposed action over time,
placing a value on those effects, and
discounting them to a given year using an appropriate discount rate.

Each one of these steps may be fraught with difficulties, but difficult as the task may be, it is increasingly important to attempt a cost/benefit analysis, and to refine the techniques with experience.

Summing up

Regulations should only be enacted if

a problem or risk exists,
government intervention is warranted, and
regulations are the best alternative.

If a regulatory scheme is required, the next question is "What kind of regulatory scheme will be efficient, effective, and fair?"

See David C. Elliott, Regulatory Reformation: Designing Effective Regulations (1997).