Session 1: Introduction: What is regulation and where does it come from?
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The rise of the regulatory refers to periods that encompass these periods. Regulation is the state
controlled utilities.
From the interventionists/Keynesian positive state
IN the 90 and 80s many organizations were privatised. After WW2 a lot of industrialized states
expanded the regulatory state. Major programmes of key sectors were nationalised.
➢ The state as a planner, direct producer of goods and services.
Rise of the regulatory state (Majone)
You get huge privatization programs in the 1980s and 1990s. And since they have a national
monopoly character you get the rise of regulatory institutions. Its really a period with the following
characteristics.
➢ Privatization
➢ Rise of the regulatory agencies
➢ Formalisations of relations
You get a decentralized state after the reforms. You get a separation between governance and
service delivery. You get more fragmentation within the state.
You get a state from providing goods and services to a state regulating the distribution of these
goods and services in the private sector (shift in the wider objectives/rowing to steering)
➢ Change in policy instrument of the state (governance of the state)
➢ ‘lean and mean’ retreat of the role of the state, retreat of majoritarian politics- tensions and
contradictions. The interventionist state was an expansion, but this regulatory state was a
detracting state. A state of diminished ambitions.
Regulation goes back before the rise of the regulatory state, and not only the regulation of utitlies.
The whole point of the rise is to emphasize of regulation as a core function of the state.
Regulatory Techniques or something else?
The only thing that isn’t considered regulation is the ‘green steps to bins initiative’. Credits ratings
are an example of regulation by a private party and the institute of the nuclear power is from both
the private and public sector.
Cig. Taxes is regulation through incentives, you make things more expensive or cheaper. They could
be backed by law or not. Calorie labelling is also regulation through addressing information
asymmetry.
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,In all these cases there are not per se economic regulations and you’re not telling them to conform
or something..
Visual display bans?
Its regulatory to the business owner, since there is a rule that bans them for selling the product. But
its nudged towards the consumer. The idea is not to make it difficult for the consumer, but in the
terms of behavioural economics it nudges you to not think of it. It’s a measure that regulatory to one
body and not to another.
Regulation
The first one emphasizes that regulations associated with rules. The 2nd one is that regulation is that
you need more than rules but regulation is an ongoing activity which you need some form of control.
So a public agency that enforces the rules, a sustained control. Furthermore its not only a state based
activity but also involves many actors.
How? Legal commands or also other modes of influence? (i.e. subsidies, supply of information)
Who? Restricted to state influence or other sources. (markets, non-govermental actors etc
decentred regulation).
Since we need to consider the 3 aspects of a regulatory regime, we need to consider regulator from a
‘regulatory regime’ perspective. Regulation is inherently about the functioning of standard-setting,
behavioural-modification and information-gathering.
Regulatory regime
Regulation includes 3 componenents.
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, ➢ Standard setting; the rules & norms of any regulatory regime, what kind of behaviour do
they adhere to, what kind of regulatory system u got in place (selfcontrol or decentralized).
These are the aspects of regulation that set out the direction (objectives) of the regulation,
namely its targets/objectives and how these objectives should be followed. It provides the
overall direction. It also includes the choice of agents to conduct regulatory activities.
➢ Information gathering: You need information once you have rules in place, to see if actors
comply to the rules so the systems of regulation requires elements of detection because
otherwise regulators don’t know whether the standard setting rules are being complied with.
Monitoring and oversight. Allow for knowledge about what is happening. Regulatees
provide regulators with information to show if they regulation works.
➢ Behaviour modification: Has to do with the way regulations are being complied with. How
this compliance is achieved relies on advise and persuasion or the threat of punishment.
This means enforcement, what kind of methods u got and how do you enforce that. Do you
go heavy handed and or light compliance. It depends on the compliance strategy.
Compliance of the rules decide whether to enforce or not and thus bring change on the
behaviour of regulatees. It provides the means of enforcement to change people’s
behaviour.
Regulator: The entity that creates and enforces the rule or regulation (Gov./public agency)
Target: The entity to which regulation applies (i.e. private party or a non-profit/public parties)
All 3 elements are inter-dependent, meaning that when focussing on regulatory regimes all 3
components need to operate in a non-dysfunctional way. This pre-requisite becomes more
demanding as the more various regulatory activities are distributed amongst more actors.
IRA (independent regulatory agencies)
➢ Organizations such as: competition authorities, financial market regulators,
telecommunication regulators, energy regulators etc.
It also look how independent these bodies are apart from the government. These organizations are
not directly responsible to the ministry. They tend to be specialized and exercise crucial functions.
Credible commitment
➢ Time inconsistencies & the need for credible commitment; if investors invest it means that
your not gonna exploit them. Politicians find this difficult since they have short term horizons
(elected over short time), they are not able to plan the long term effects of certain policies.
➢ Exhaustion of the interventionist state
➢ Need for credible commitment to attract foreign capital investment
➢ Preferences of policy-makers are time-inconsistent
➢ Utitlies are said to be particularly vulnerable to expropriation
- Large sunk investment
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, - Durable assets
- Politicalisation.
Independent agencies are not influenced by politics meaning their policy continuity keepson through
de-policiasion. Agencies as commitment devices in regulatory policy. There is a believe in
technocracy.
Why regulate?
➢ Market based rationales
Market failures (monopolies, information asymmetry, externalites); regulation comes in because the
market gives results that are not beneficial for the public. An exception to monopolies are the
economies of scale. Consumers cannot make well-informed choice in the market-place when there
are market failures.
Monopoly: A single seller that controls the whole market, and maximize profits by restricting
their output and setting prices above MC. Resulting in reduced output, higher prices and
transfer of economic rents from consumers to the monopolist (deadweight loss). Bring in the
market might solve this problem.
• Security of service: In the event that a market cannot provide in cases of surplus or slack
to the people then the government needs to regulate this through i.e. subsidies or lighter
pricing constraints.
• Windfall taxes: Companies making profits through luck or other circumstances out of
their control. There are 2 ways to look at this (1) being that companies shouldn’t make
extra profits from far rising prices for certain goods and (2) that taxing these extra
incomes might encroach on the market principles and private ownership.
Information asymmetries: Consumers need to have information about products. It would be
costly for consumers to research the impact of certain product so the government regulates
this with information. Otherwise people will make inferior choices based on this information
asymmetry. So the government does this through labelling requirements and the demand to
publish comparable information.
Externalities: Externalities occur when consequences of the production of a particular
service or good are not ‘costed’ within the production cost. A way to deal with this is to
internalize the costs and benefits into the internal cost-production function.
Public Goods/Common pool resources: You cannot use market principles for public goods,
since you cannot exclude people from using it. On the contrary this gives the free rider
problem since people can enjoy it and decide whether to pay for it or not. So the
government taxes it so everyone pays and everyone uses it.
> Common pool problem/tragedy of the commons: Goods characterized by non-
excludability will cause depletion of the overall resources base.
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