Summary: Understanding Regulation by Baldwin, Cave and Lodge (2012)
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UNDERSTANDING REGULATION: Theory, Strategy, and Practce
Chapter: 1, 2, 3, 4, 7, 8, 11, 12, 14, 15, 16, 17, 18, 19, 20, 21, 27
Robert Baldwin
Martin Cave
Martin Lodge
Summary writen by Abe Rademaker and Lars van Bladel in 2018
Chapter 1 – Introduction
The focus is not on providing ‘how to’ accounts of regulatory experience. Instead, our aim is to
highlight the contested areas and issues that are produced by regulation. Regulation has become a
mater of topical debate in a way that it was not even a single decade ago. This global phenomenon
was partly prompted by the activities of international organization. Supporters saw regulation as a
technocratic device that had the potential to exert rational controls over important economic and
social activities. Sceptics regarded regulation as litle other than ‘red tape’ and a potential burden on
economic activity.
As a consequence, regulation can be said now to have reached a state of maturity, both in an
intellectual and in a practical sense. Intellectually, theoretical perspectives have developed rapidly
into an impressive body of scholarship and, in the world of practice, there has developed a distinct
and expanding international and national ‘regulatory community’ that shares similar languages,
concepts, and concerns. In this process, central regulatory issues such as those relating to standard-
setting and enforcement have become maters of regular discussion in diffeerent policy and academic
communities.
What is Regulaton?
Selznick’s notion of regulation as sustained and focused control exercised by a public agency over
activities that are valued by a community has been referred to as expressing a central meaning, but it
is perhaps useful to think of the word regulation being used in the following diffeerent sense:
1. As a specifc set of commands.
Regulation involves the promulgation of a binding set of rules to be applied by a body
devoted to this purpose
2. As deliberate state infuence.
All state actions that are designed to infuence business or social behaviour.
3. As all forms of social or economic infuence.
According to this third, broad usage of the term ‘regulation’, there is no requirement
that the regulatory effeects of a mechanism are deliberate or designed, rather than merely
incidental to other objectives.
4. The infuence of regulation may also be enabling or facilitative.
Issues on the Regulatory Agenda
In the nineteenth century, there was a burgeoning of regulation, with the emergence of specialist
regulatory institutions and a host of measures dealing with public health and employment
conditions. In the twentieth century, the decade saw the licensing of goods and marketing boards
that fulflled both operational and regulatory functions. The nationalization of core industries, such as
,the railways, were even framed as issues of regulation. In the post-war period, independent
regulatory bodies had been carrying out key functions of government. During the 80s and 90s, much
stress was placed by governments and commentators on the problems and costs of regulation and
the case for deregulating the economy. By the mid-1990s, some 25 million customers were served by
the main four regulated utilities industries alone. Regulation and deregulation had moved to
positions high on the political agenda. It was in the feld of utilities regulation that the most urgent
political debates took place towards the end of the last millennium. Atention focused on the issues
of efciency, accountability, and fairness in the system of regulating. In parallel to these
developments in the regulation of economic and social activities, there was also the rise of regulation
inside government. This included a growing prominence of formal auditing and fnancial controlling
activities. By the turn of the millennium, the appropriateness of regulatory strategies and structures
had become a signifcant public concern, and this led to a set of responses and debates over the frst
decade following 2000.
One prominent issue was the governance of regulatory bodies. A second concern relates to the
effeects and biases of regulatory regimes. A third debate that grew in the new millennium was one
driven by the emergence of new technologies and products.
With respect to regulatory strategy, the past decade has witnessed a growing appetite to explore the
potential of ‘non-traditional’ methods of regulation. There has been greater weight given to
arguments for controlling not by state regulation but by ‘meta-regulation’ and regimes that focus on
auditing the control regimes being operated within businesses and corporations themselves. A
further recent change that has emerged in parallel with such ‘auditing’ approaches has been the
growth of a tendency to see regulatory issues in terms of risks and to see control issues as questions
of risk management. (as a result, approaches like ‘beter regulation’, ‘regulatory impact
assessments’, ‘high-quality regulation’’
Such discussions of ‘meta-regulation’ and ‘steering’ raised questions about the bodies that should be
given the task of regulating and the level of government at which regulation should be positioned.
Another important focal concern has developed in infuence over the last decade. A strand of
scholarship has emphasized the degree to which regulatory regimes are fragmented, multi-sourced,
and unfocused. On this view, fragmented regulatory authority is frequently encountered within
national systems, and public, private, and (increasingly’ hybrid organizations ofen share regulatory
authority. This perspective suggests that to study regulation by looking at single regulatory agencies
is to adopt rather a limited viewpoint. (i.e. you have to look a the multi-level character of regulation’
When more specifc regulatory questions have been explored, there have also been dramatic
changes of treatment during the new millennium. A regulatory issue that has been particularly
productive of fresh theories and approaches has been that of enforcement and compliance. Long
gone are the days when one might comfortably profess to be an advocate of either ‘compliance’ or
‘deterrence’ approaches. In the wake of the well-established theories of ‘responsive regulation’ and
‘smart regulation’, newer theories of ‘problem-centred’ regulation have moved compliance theory
onwards, and have then been both exposed to criticism and refned. More atention has been paid to
motivations and behaviours, to interactions of control systems, and to ‘risk-based’ and ‘principle-
based’ approaches to regulatory enforcement.
As regulation has come to the forefront of public debates in recent years, some particular issues have
exerted an especially strong grasp on public and political atentions. In some cases, particular items
have shifed place on the regulation agenda. These freshly developing agendas of regulation have
not, however, always gelled into highly coherent packages of policy or theory. The ‘beter regulation’
,group of initiatives can, for instance, be seen as rich in tensions and contradictions. In itself, the
‘beter regulation’ agenda could be seen as an uneasy rhetorical package that combines a
continuation of the ‘anti-red tape’ message and the belief in technocratic and ‘rationalizing’ tools for
enhancing regulatory quality.
As a result of such developments and crises, regulation now occupies its place as a central organizing
concern for the worlds of practice and research alike. At the same time, it has increasingly been
asked whether regimes of regulation or self-regulation can satisfactorily solve complex problems.
Chapter 2 – Why Regulate?
Motives for regulating can be distinguished from technical justifcations for regulating. Government
may regulate for a number of motives. To begin, though, we should consider the technical
justifcations for regulating that may be given by a government that is assumed to be acting in pursuit
of the public interest. Many of the rationales for regulating can be described as instances of ‘market
failure’, (but also important is ‘market absence’’. In this chapter, we discuss the traditional ‘market
failure’ rationales for regulating, but we also consider the argument that there may be other reasons
to regulate and that these have a basis in human rights or social solidarity, rather than market,
considerations.
Market Failure Ratonales
MONOPOLIES AND NATURAL MONOPOLIES
Monopoly pricing and output is likely to occur and be sustained where three factors obtain:
1. Single seller occupies entire market.
2. The product sold is unique in the sense that there is no substitute sufciently close for
consumers to turn to.
3. Substantial barriers restrict entry by other frms into the industry, and exit is difcult.
Where monopoly occurs, the market ‘fails’ because competition is defcient. The effeects of
monopoly, as compared to perfect competition, are reduced output, higher prices, and transfer of
income from consumers to producers. One response to potential monopolies is to use competition
(or antitrust’ laws so as to create a business environment that is conducive to competition. Where a
‘natural monopoly’, exists, however, the use of competition law may be undesirable.
Natural monopoly -> when the relevant market can be served at least cost by a single frm -> less
costly to society to have production carried out by one frm than by many (e.g. railway or electricity
companies’.
Restoration of competition by use of competition law is not, however, an appropriate response, since
competition may be socially costly and thus regulation of prices, quality, and output as well as access
may be called for. The regulator will try to set price near incremental cost (-> the cost of producing
an additional unit’ in order to encourage the natural monopolist to expand its output to the level
that competitive conditions would have induced. (noteworthy: the economies of scale phenomenon
(which has ‘natural monopoly’ as a result’ may effeect only one part of a given process (e.g. the
transmission of electricity has a very large economies of scale available, not the generaton though’.
, The task of many governments and regulators (at least those commited to minimalist regulation’ is
to identify those parts of a process that are naturally monopolistic so that these can be regulated
while other aspects are lef to the infuence of competitive forces.
WINDFALL PROFITS
A frm will earn a windfall proft (sometimes called an ‘economic rent’ or excess proft’ where it fnds
a source of supply signifcantly cheaper than that available in the marketplace. Regulation may be
called for when it is desired either to transfer profts to taxpayers or to allow consumers or the public
to beneft from the windfall.
Where the windfall is the result of planned investments of money, effeort, or research, or where
society might want to create incentives to search for new efciencies, products of areas of demand,
there is a case for allowing windfall profts to be retained.
EXTERNALITIES
The reason for regulating externalities (or ‘spillovers’’ is that the price of a product does not refect
the true cost of society of producing that good, and excessive consumption accordingly results. The
rationale for regulation is to eliminate this waste – and to protect society or third parties suffeering
from externalities – by compelling the internalization of spillover costs – on ‘polluter pays’ principles.
INFORMATION INADEQUACIES
Competitive markets can only function properly if consumers are sufciently well informed to
evaluate competing products. The market may, however, fail to produce adequate information and
may fail for a number of reasons: information may cost money to produce. The producer of
information, however, may not be compensated by others who use that information.
Regulation, by making information more extensively accessible, accurate, and affeordable, may
protect consumers against information inadequacies and the consequences thereof, and may
encourage the operation of healthy, competitive markets.
CONTINUITY AND AVAILABILITY OF SERVICE
In some circumstances, the market may not provide the socially desired levels of continuity and
availability service. Thus, where demand is cyclical, waste may occur as frms go through the
processes of closing and reopening operations. Regulation may be used to sustain services through
troughs
Regulation may be justifed in order to produce socially desirable results, even though the cross-
subsidizations effeected may be criticisable as inefcient and unfair.
ANTI-COMPETITIVE BEHAVIOUR AND PREDATORY PRICING
Market may be defcient not merely because competition is lacking: they may produce undesirable
effeects because frms behave in a manner not conducive to healthy competition. Such behaviour is
predatory pricing. This occurs when a frm prices below costs, in the hope of driving competitors
from the market, achieving a degree of domination.
The aim for regulators is to sustain competition and protect consumers from the ill-effeects of the
market domination by outlawing predatory or other forms of anti-competitive behaviour.
PUBLIC GOODS AND MORAL HAZARD
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