Publications

Assessing Regulatory Alternatives

1. Taxation
2. Expenditure
3. Loans and Loan Guarantees
4. User Charges
5. Public Ownership
6. Persuasion
7. Modification of Private Law Rights and Procedures
8. Insurance

A tax is a financial levy governments impose on a person or corporation. The primary purpose of a tax is to raise revenue. It can, however, be designed to further the government's economic or social policy goals by modifying the economic incentives that influence taxpayers' behaviour. Typically, taxation does this by raising or lowering the cost of engaging in a specific activity. This should result in more or less of the behaviour. Instruments like taxation are particularly useful where economic factors play a key role.

One common technique is the “tax expenditure” -- a deduction or credit that reduces the taxes that would otherwise be owing. The right to claim the reduction depends on whether the person is engaging in, or refraining from, a certain behaviour.

The federal government operates at least eight major tax systems: personal income tax; corporate income tax; goods and services tax; customs duties; excise taxes and duties; air transport tax; unemployment insurance; and the CanadaPension Plan.

User charges (e.g., dumping fees) may be viewed as a form of tax. However, they are actually charges for using a facility or consuming a good or service. They are discussed in more detail later on.

Charges such as environmental emissions fees are true taxes (the government does not own or operate the air or water being polluted). They are designed tomodify behaviour by imposing a charge on particular activities or sources of an environmental problem. They can be applied to pollution emissions, inputs to a production process, or final products. Regimes that combine environmental charges and tax incentives are using a “carrot-and-stick” approach.

Fees for regulatory permissions and refundable-deposit regimes are also examples of taxes used to achieve regulatory objectives. Deposit refund schemes, which are specific to the environmental area, are actually refundable taxes. Under this type of regime, a tax is imposed on a product at the point ofsale, but is later refunded if the product is returned to a collection system. These economic instruments can be used for products that can be reused or recycled or that create environmental problems if they are not disposed of appropriately.

It is important to distinguish between taxes that are linked to behaviour and other charges that are aimed at recovering costs the government has incurred to provide activities or services that form part of a regulatory program. Cost-recovery charges supplement regulatory schemes and are not subject to the same constitutional restrictions as taxation (see below). They can, however, have important implications for levels of compliance with regulatory requirements.

The federal government's constitutional authority to create taxes is extremely broad. It covers direct taxes (e.g., income taxes), indirect taxes (e.g., customsand excise), and licence fees. However, there are important constitutional limits to this authority where the activities or industry affected would otherwise fall under provincial jurisdiction. The Department of Justice can provide advice on the constitutional implications of taxation instruments. The Department of Finance has responsibility for the substantive aspects of taxation policy.

Examples

The following are examples of tax measures used for regulatory purposes:

• accelerated write-off of capital cost allowance for eligible investments in pollution abatement equipment;

• taxes on alcohol and tobacco products to reduce consumption;

• fuel taxes (carbon content);

• taxes on fertilizers and pesticides;

• taxes on non-returnable and reusable packaging;

• special levies on canned beverages to promote the use of reusable glass containers;

• customs duties on imports to encourage consumption of domestically produced goods;

• air and water emissions fees (e.g., NOx emissions);

• deposits for reusable and recyclable containers (a refundable tax);

• taxes on tires;

• taxes on car air conditioners;

• graduated taxes on cars linked to fuel economy ratings;

• tax incentives for hiring disadvantaged workers; and

• deposits and refunds for beverages containers, tires, batteries and lubricating oils.

Advantages

Taxation may offer the following advantages; it:

• has the potential to greatly reduce the overall costs to the economy of achieving a particular regulatory goal;

• can be less costly to administer, if piggy-backed on existing tax systems or distribution systems;

• can encourage innovation and competition, reduce government administrative burdens, and provide greater flexibility in policy-setting;

• generates revenue for the Government;

• is potentially more efficient than regulation -- it allows and relies on operation of market processes;

• is less intrusive -- it allows greater freedom of choice than traditional command-and-control regulation;

• is more transparent -- the cost of regulatory benefit (e.g., cleaner air) is directly reflected in the price of products;

• allows flexibility and adaptation of desired behaviours;

• avoids problems of centralized discretionary decision-making;

• can focus clearly on economic determinants of behaviour; and

• can compensate for the lack of resources necessary for people to be able to engage in desired behaviour.

Disadvantages

Taxation may have the following disadvantages:

• it can be a relatively sophisticated tool housed in an already complex system;

• potential claimants may not know about its existence;

• rules governing liability and eligibility can be complex;

• it can be hard to target accurately;

• it may require more precise monitoring than traditional, detailed regulation;

• it may be difficult to determine the magnitude of the tax or tax incentive necessary to modify the behaviours;

• claimants accustomed to receiving tax incentives may develop a sense of entitlement to the benefits, making it difficult to reduce or eliminate them;

• the public may view an indirect method of influencing behaviour as inappropriate;

• administration may be comparatively costly, depending on the number of taxpayers and the need for a new tax system;

• it may be unfair if the target population has very mixed abilities to pay, to take advantage of tax reductions, or to cope with the complexities of the tax system; and

• it can skew the competitive positions of firms in the marketplace.

Note, however, that several of these problems are not unique to taxation.

Factors Favouring Use

The following conditions favour using taxation:

• target behaviour is influenced primarily by economic factors;

• demand for the goods or products affected is highly elastic, accentuating the price modification effects of the tax and, hopefully, the impact on production behaviour;

• there would be fewer tax paying units, reducing the costs of collection and monitoring;

• target behaviour can be linked to exchange transactions, facilitating collection, monitoring, and enforcement;

• there are “gates” or natural control points in the affected activities (facilitates collection, monitoring, and enforcement);

• co-operation is expected from importers, producers, distributors, and retailers;

• targeted individuals already have potential tax liability and ability to pay;

• liability to pay tax can be precisely defined in the legislation;

• targets (taxpayers or products) for new or increased taxes can be easily and precisely identified, facilitating collection, monitoring, and enforcement;

• behaviour requires expenditures on specific, definable goods or services;

• eligibility for incentives (tax credits or deductions) can be easily demonstrated by claimants and verified by government authorities;

• targeted taxpayers are relatively sophisticated;

• targets for tax incentive have sufficient level of tax liability to make reduction meaningful.

Contraindicators

The following conditions work against using taxation:

• target behaviour is determined primarily by social or psychological factors;

• target behaviour is not engaged in by players who would be affected by imposing taxes of extension or tax incentives;

• products of affected industries are subject to provincial regulatory control (potential constitutional difficulties);

• rules necessary to ensure proper targeting would significantly
  complicate tax system, increasing the cost of administration and compliance, detracting from the transparency and perceived fairness of the tax system, and favouring large, more sophisticated taxpayers;

• demand for the goods or products affected is highly elastic,increasing the general economic efficiency losses resulting from the tax; and

• target activities are highly diffused throughout the economy,
  complicating monitoring and enforcement.

Program Delivery Implications

If you are considering taxation as a method of influencing behaviour, you will want to keep the following points in mind:

• you must target the levy or tax reduction precisely to get maximum impact on behaviour;

• creating a new tax system is costly;

• you need to find efficient ways of collecting the tax or providing the tax reduction;

• you need to be able to verify and monitor the taxpayer's liability and eligibility;

• you will have to be capable of effective audit and enforcement;

• explanatory materials may be required to explain the tax measures; and

• new or existing forms will have to be prepared.

An expenditure is a transfer of a benefit by government (or an agent ofgovernment) to people in the private sector or to other levels of government. Typically, an expenditure is a monetary grant or contribution. However, benefits might also be provided in kind (e.g., supplying information, seconding skilled personnel, providing material).

Expenditure can elicit a more frequent occurrence of a desired behaviour by reducing the cost of engaging in that behaviour. Consequently, if you choose expenditure as a regulatory alternative, the benefit will have to be directed to the people whose behaviour you want to modify or to others with whom they deal.This approach would be most effective where economic factors play a major role in influencing the behaviour.

Strategic procurement policy is a variant on the simple transfer of benefits. Here, government uses its purchasing power to require that suppliers conform with certain specifications relating to conduct or product attributes. The impact on behaviour will be greater where the government is such an important customer that suppliers redesign products, and change business practices and production processes to keep the business.

This technique has maximum impact where it is difficult for the supplier to differentiate between the government and other customers (i.e., where there is a spill-over effect). For example, if economies of scale dictate undifferentiated production runs, then government-mandated specifications would also be applied to products produced for other customers. Similarly, an employment equity program established by a company so that it can qualify for federal contracts would not be suspended while it is working on contracts for private sector or provincial government customers.

Examples

The following are examples of expenditure used for regulatory purposes:

• grants to reimburse farmers or fishery workers for losses suffered through crop failure;

• grants to companies for training and hiring disadvantaged workers;

• government purchase of commodities to stabilize prices and establish base levels of return for producers;

• the granting of licences (with low royalties) for government-patented

• processes or products (e.g., anti-lock braking systems) that facilitate desired behaviour or production of desired products;

• grants for purchasing pollution abatement equipment;

• grants to homeowners for installing insulation;

• rebates for purchasing energy-efficient light bulbs and appliances;

• grants for upgrading safety equipment;

• grants or contributions to facilitate voluntary action (e.g., subsidizing the development of consensus standards or the setting of international standards);

• grants to cover the costs of switching to new crops or varieties of existing crops;

• grants to supplement income shortfalls for producers in the agricultural and fisheries sectors;

• buy-outs of current licence-holders to reduce production capacity in the fisheries and transport sectors;

• grants for constructing sewage treatment facilities;

• grants to transport carriers to provide service on unprofitable routes;

• reduced mailing rates for pre-sorted bulk mail;

• procurement policies requiring major suppliers to have employment equity programs or to use environmentally-friendly production methods, or the specification of product standards; and

• grants to those involved in monitoring behaviours and taking social, economic or legal action to modify the activities (e.g., funding for “Court Challenges” program; funding to environmental and consumer groups for advocacy functions).

Advantages

Expenditure may offer the following advantages; it:

• compensates for the lack of resources necessary for people to be able to engage in the desired behaviour;

• can be precisely targeted to people and corporations whose behaviour needs to change;

• is potentially more efficient than regulation -- allows and relies on the operation of market processes, avoiding economic allocative efficiency losses normally attributable to regulatory controls;

• is less intrusive -- allows greater freedom of choice than traditional command-and-control regulation;

• allows flexibility and adaptation of desired behaviours;

• avoids problems of centralized discretionary decision-making; and

• can focus on economic determinants of behaviour.

Disadvantages

Expenditure may have the following disadvantages:

• expenditures directly increase the government deficit;

• it may be difficult to determine the magnitude of the benefit necessary to modify the behaviours;

• recipients may develop a sense of entitlement to the benefits, making it difficult to reduce or eliminate them;

• the public may view this indirect method of influencing behaviour as inappropriate, as a government giveaway;

• potential claimants may not know that the expenditure programs exist;

• you have to target the benefit precisely to get the maximum impact on behaviour;

• rules governing eligibility can be complex and can amount to de facto regulation;

• administration may be costly, requiring screening applicants, renegotiating agreements, monitoring performance, processing payments, and auditing; and

• it may be unfair -- variation in take-up can skew the competitive positions of firms in the marketplace if the target population has varied abilities to cope with the complexities of the process (larger, more sophisticated, better-connected firms may benefit more).

Factors Favouring Use

The following conditions favour using expenditure:

• sufficient funding or in-kind benefits are available;

• target behaviour is influenced primarily by economic factors;

• the inability of players to comply with behavioural requirements is partly due to lack of resources;

• the number of easily-identifiable potential beneficiaries is small, reducing the costs of administration and increasing coverage;

• eligibility can be precisely defined (e.g., behaviour requires expenditures onspecific, definable goods or services);

• eligibility for incentives (tax credits or deductions) can be easily demonstrated by claimants and verified by government authorities;

• target beneficiaries are relatively sophisticated;

• compliance is easily discernible, facilitating monitoring; and

• compliance requires discrete steps, allowing progress payments contingent on evidence of compliance.

Contraindicators

The following conditions work against using expenditure:

• target behaviour is determined primarily by social or psychological factors;

• those engaging in the target behaviour would not be affected by the availability of resources provided through expenditure;

• funding or in-kind benefits are insufficient to accomplish behavioural changes;

• the rules necessary to ensure proper targeting of benefits would be very complex, increasing the cost of administration and compliance; detracting from the transparency and perceived fairness of expenditure programs; and favouring larger, more sophisticated firms; and

• confirming compliance with contractual requirements would be difficult.

Program Delivery Implications

If you are considering expenditure as a method of influencing behaviour, you will want to keep the following points in mind:

• you will need to carefully define the requirements governing eligibility;

• you will need to develop an approval process, a standard agreement, a program to verify compliance, an accounting system, a payment control system, and an audit function;

• you will require legal assistance for program administration and may require technical assistance for processing applications and verifying claimants' eligibility for payments; and

• you will need a communications strategy to ensure that prospective applicants learn about the program and its requirements.

Loans and loan guarantees can also be used as financial incentives for desired behaviour. In a loan, the government transfers money to the borrower, who is subject to contractual requirements that will bring about the desired behavioural changes. Loans may be interest-bearing or interest free, and repayment terms can vary significantly, depending on the nature of the transaction. In some cases, the government might transfer possession of tangible assets (e.g., equipment) instead of money.

With loan guarantees, the government does not itself transfer money, but provides contractual assurance to third-party lenders that it will make good on a loan (up to a specified maximum) if the borrower defaults. If the government is required to make good on its guarantee, there is probably little likelihood of recovering from the borrower. Thus, a loan guarantee is best thought of as a contingent liability on the government's books, whereas a loan is an asset.

Examples

The following are examples of loans or loan guarantees used for regulatory purposes:

• loans or loan guarantees for purchasing and installing pollution abatement equipment;

• loans or loan guarantees for retro-fitting workplaces to meet new safety and health standards;

• loans or loan guarantees for purchasing and installing upgraded equipment;

• loans or loan guarantees to defray the cost of training and educating employees;

• loans or loan guarantees to cover initial research and development costs of new technology and products; and

• loans or loan guarantees to cover the cost of switching to new crops or varieties of existing crops.

Advantages

Loans and loan guarantees may offer the following advantages; they:

• help compensate for the lack of resources necessary for people to be able to engage in the desired behaviour;

• do not contribute (as much) to increasing the Government's deficit;

• if the loan is interest-bearing, can produce revenue for the Government;

• can be precisely targeted to people and corporations whose behaviour needs to change;

• are potentially more efficient than regulation -- allow and rely on the operation of market processes, avoiding the economic allocative efficiency losses normally attributable to regulatory controls;

• are less intrusive -- allow greater freedom of choice than traditional commandand- control regulation;

• allow flexibility and adaptation of desired behaviours;

• avoid the problems of centralized discretionary decision-making; and

• can focus on economic determinants of behaviour.

Disadvantages

Loans and loan guarantees may have the following disadvantages:

• they contribute somewhat to increasing the Government's deficit and contingent liabilities;

• they may be more complex to administer than expenditure programs, requiring screening applicants for eligibility and credit-worthiness, negotiating loan agreements, monitoring performance, processing payments, collection, and audit);

• it may be difficult to determine the total amount of loans necessary to modify the behaviour;

• the public may view this indirect method of influencing behaviour as inappropriate;

• potential borrowers may not know the loan programs exist;

• you have to target the benefit precisely to get the maximum impact on behaviour;

• rules governing eligibility can be complex and can amount to de facto regulation; and

• it may be unfair -- variation in the take-up of loans can skew the competitive positions of firms in the marketplace if the target population has varied abilities to cope with the complexities of the process (larger, more sophisticated, better-connected firms may benefit more).

Factors Favouring Use

The following conditions favour using loans or loan guarantees:

• sufficient loan funds (or in-kind benefits) are available;

• target behaviour is influenced primarily by economic factors;

• inability of players to comply with behavioural requirements is partly due to lack of resources;

• private lenders are unwilling to provide loans at competitive rates to target borrowers for specified purposes;

• the number of easily identifiable potential beneficiaries is small, reducing the cost of administration and increasing coverage;

• eligibility can be precisely defined (i.e., behaviour requires xpenditures on specific, definable goods or services);

• eligibility for loans or loan guarantees can be easily emonstrated by claimants and verified by government authorities;

• target beneficiaries are relatively sophisticated;

• compliance is easily discernible, facilitating monitoring;

• compliance requires discrete steps, allowing staged loan advances contingent on evidence of compliance); and

• potential borrowers are known to be credit-worthy.

Contraindicators

The following conditions work against using loans or loan guarantees:

• target behaviour is determined primarily by social or psychological factors;

• those engaging in the target behaviour would not be affected by the availability of resources provided through loans or loan guarantees;

• private lenders would be willing to make loans at competitive rates to target borrowers for specified purposes;

• potential borrowers are known to be on the verge of insolvency or are in declining industries;

• pool of funds or in-kind benefits are insufficient to accomplish behavioural changes;

• rules necessary to ensure proper targeting of loans or guarantees would be very complex, increasing the cost of administration and compliance; detracting from the transparency and perceived fairness of the loan program; and favouring larger, more sophisticated firms; and

• confirming compliance with loan agreement requirements would be difficult.

Program Delivery Implications

If you are considering loans or loan guarantees as a method of influencing behaviour, you will want to keep the following points in mind:

• you will need to carefully define the requirements governing eligibility;

• you will need to develop an approval process, a standard loan agreement, a program to verify compliance, and accounting system, a payment control system, a collection system, and an audit function;

• you will require legal assistance for program administration and may require technical assistance for processing loan requests and verifying applicants' eligibility for payments; and

• you will need a communications strategy to ensure that prospective applicants learn of the loan program and its requirements.

User charges are fees imposed for using or consuming collective goods, facilities or services. User charges (e.g., dumping fees) have been used extensively in the environmental area. They are designed to modify behaviour by raising or lowering the cost of engaging in a specific activity (e.g., using certain production inputs or methods of production). In theory, the charges should be set so that the price of the goods or services reflects their true value -- then the goods or services will not be over-utilized.

To be successful, charges must be applied either in situations where there is a monopoly or in conjunction with regulatory regimes that force people to deal with the chosen suppliers. A good example of a monopolistic situation is water service which is available only from local utilities; there are no economically viable alternatives, at least in most urban areas. Examples of the second situation are municipal sewage services and garbage collection. There are viable alternatives (e.g., septic tanks, dumping garbage at night in the city park), but these are controlled through regulation. When the alternatives are perceived to be more expensive than the service for which a user fee is charged (e.g., cost of purchasing and installing a septic tank vs. the payment for sewage service), there will be less need for regulatory controls.

It is important to distinguish between charges that are applied for consuming collective goods, services, or facilities and charges to recover costs the Government has incurred to provide activities or services that form part of a regulatory program. Cost-recovery charges applied to elements of a regulatory program can increase the regulatory burden and adversely affect levels of compliance. Whether cost-recovery charges are effective or not depends on the levels of the charges, the regulatees’ ability to pay, and the impact of other factors affecting compliance.

Examples

The following are examples of user charges used for regulatory purposes:

• user fees for water consumption
• user fees for waste water treatment
• user fees for sewage treatment
• user fees for collection of solid waste
• user fees for disposal of solid waste (landfill)
• user fees for collection of toxic waste
• user fees for storage of toxic waste
• user fees for disposal of toxic waste and
• differential hydro rates that penalize increased consumption

Advantages

User charges may offer the following advantages; they:

• have the potential to reduce the overall cost to the economy of achieving a particular regulatory goal;

• provide the flexibility to increase or decrease the desired behaviour by manipulating price;

• can encourage innovation in developing alternatives to facilities, services, and production technologies;

• generate revenues for the Government;

• are potentially more efficient than regulation -- they rely on the operation of market processes to determine level of consumption or use;

• are less intrusive -- allow greater freedom of choice than traditional command-and-control regulation;

• avoid problems of centralized discretionary decision-making;

• focus clearly on economic determinants of behaviour; and

• can compensate for the lack of resources necessary for people to be able to engage in the desired behaviour by setting subsidized price levels.

Disadvantages

User charges may have the following disadvantages; they:

• could increase the need for regulatory controls over substitute behaviours;

• require monitoring, control, charging, collection, and maintenance systems;

• may require significant investment in plant and infrastructure;

• may generate legal liabilities for government (e.g., failure of service, improper containment);

• may be unfair, if the target population has very mixed abilities to pay; and

• can skew the competitive positions of firms in the marketplace.

Factors Favouring Use

The following conditions favour user charges:

• target behaviour is influenced primarily by economic factors;

• government has a monopoly (or there are only a few suppliers) for supply of the relevant goods, services, or facilities;

• there are no viable alternatives or the user of alternatives can be easily detected;

• there are “gates” or natural control points in the affected activities, facilitating collection and monitoring); and

• target individuals have ability to pay.

Contraindicators

The following conditions work against user charges:

• target behaviour is determined primarily by social or psychological factors;
  and

• lower-cost alternatives are readily available and are not easily monitored or controlled.

Program Delivery Implications

If you are considering user charges as a method of influencing behaviour, you will want to keep the following points in mind:

• they may require substantial investment in plant and premises (including the search for facilities, planning, maintenance, and replacement); and

• this is a business -- it will have to be run efficiently and be responsive to customer demands. History shows that, in the long run, people prefer choice.

Governments in Canada have frequently used ownership of companies in “sensitive” industries to achieve public policy goals. Public ownership can be used to accomplish a wide range of public policy objectives, e.g., to control natural monopolies; to promote nation-building and community development; to moderatethe effects of economic transitions and stabilize income; to ensure capital funds are available for specific purposes; to promote national security and assure the supply of specific goods and services; to establish competition; and to control externalities (both negative and positive) of market activities. Often, the companies are dominant in their markets, which allows them (under government direction) to influence market behaviour (both production and consumption).

Public ownership can take a variety of forms. The most common is the Crown corporation, established under special legislation. However, the government can also carry ownership of companies established under the generic corporations legislation. In either case, the government may own part or all of the shares.

The government is involved only minimally in the day-to-day operation of the firm, if at all. It exercises more significant control over senior-level appointments, corporate policies, strategic planning and, especially, financing. One of Canada’s unique contributions to the world of regulation has been to combine the techniques of public ownership with regulatory control over the industry inquestion. This allows two avenues of control and provides greater flexibility for implementing public policy objectives.

Whether of not ownership is used as an instrument of public policy depends a great deal on the prevailing philosophy about the role of government in the private sector. At the time this guide was written, public enterprise was not favoured, particularly where the firms would be operating in competitive markets.

Examples

Public ownership has been used, in part for “regulatory” purposes, in the following areas:

• agricultural loans
• agricultural insurance
• sale of agricultural products (marketing boards)
• automobile insurance
• film production and financing
• lotteries and other forms of gambling
• sale of alcoholic beverages
• production of currency
• postal service
• rail and air transport
• broadcasting
• petroleum exploration, refining, and marketing
• atomic energy applications
• electronic power generation and distribution
• water distribution and
• telecommunications (including satellite services)

Advantages

Public ownership may offer the following advantages:

• it is potentially more efficient than regulation -- and avoids imposing broad-based regulatory requirements on the private sector;

• it can ensure virtually 100 percent compliance with behavioural specifications if the Crown corporation enjoys a monopoly or is so dominant that competitors must follow its lead;

• cross-subsidization through pricing policies allows income redistribution to be accomplished less visibly;

• it can compensate for the lack of resources necessary for people to engage in the desired behaviour;

• it facilitates more efficient and more informed policy development and decision-making by ensuring there is better knowledge and understanding of relevant markets and industries (market participants know more than regulators), and by internalizing the process of dealing with multiple policy objectives; and

• it can eliminate or significantly reduce the cost of rule-making, monitoring and promoting compliance, and enforcement.

Disadvantages

Public ownership may have the following disadvantages:

• public ownership of the dominant firm (particularly when combined with economic regulatory controls over entry and price) can significantly impair economic efficiency and impede the dynamic adjustment of affected markets by perpetuating dominance; insulating the firm from competitive pressures; hindering new entrants; and blunting the pressures for cost-efficiency and innovation which can lead to the adoption of new technology, and the development of new products and new production, distribution and marketing methods);

• there is a potential lack of responsiveness to customer demands;

• it may be unfair, should the Government become involved as a competitor in a marketplace where there is the potential for workable competition;

• there are problems of political control and accountability;

• there is the potential to increase the Government's deficit or contingent liabilities;

• the more the Crown corporation operates in an arm's-length relationship with the Government, the more difficult and costly it is to monitor the effectiveness;

• remuneration levels for officers and employees that significantly exceed those in government departments and agencies (not to mention the private sector) may be seen as being unfair.

Factors Favouring Use

The following conditions favour using public ownership:

• a publicly owned firm must be sufficiently dominant in the relevant markets to influence the behaviour of other participants (i.e., consumers and competitors);
• the Government is willing to use this type of instrument;
• the Government is a major purchaser of the target goods or services;
• it is difficult to develop exact, legally-enforceable specifications for the product;
• there is a need to continually control behaviour at the micro-management level;
• there is a need for low-profile redistribution of income;
• the target behaviour is influenced by economic, social and psychological factors;
• people are unable to comply with behavioural requirements due partly lack of resources; and
• there is a need for a constant, visible symbol of the Government's commitment to certain values (responsiveness).

Note that, although market dominance will promote the effectiveness of this instrument, it also constitutes a major risk factor for economic efficiency (see below).

Contraindicators

The following conditions work against using public ownership:

• relevant markets are competitive, negating the ability of a Crown corporation to significantly influence market behaviour and provide superior information to the Government for policy purposes; and

• the Government opposes expanded use of public ownership.

Program Delivery Implications

If you are considering public ownership as a method of influencing behaviour, you will want to keep the following points in mind:

• it may require substantial investment in plant and premises (including a search for facilities, planning, maintenance, and replacement);

• this is a business -- it should be run efficiently and be responsive to customer demands;

• it will require appropriate corporate ownership infrastructure;

• it may increase the Government's deficit or contingent liabilities (loan guarantees are a common method of facilitating financing for Crown corporations); and

• it will require appropriate political and parliamentary control, monitoring and accountability arrangements (including external audit).

Persuasion, or promoting voluntary action, is a very important alternative to regulatory intervention. Under this instrument, the government does not make legally binding rules that specify the desired behaviour. Instead, it attempts to achieve its policy objectives by persuading the appropriate players to modify their behaviour voluntarily. Research on regulatory compliance and practical experience have shown that non-compliance often results from ignorance. The players involved may not understand or appreciate the problem being addressed, the rationale behind the behavioural requirement, the desired behaviour, or how to achieve the behaviour. Fear of sanctions by the state, which is the critical difference between regulation (mandatory rules) and voluntary action, is generally less important in determining behaviour than ensuring people understand why the behaviour is required.

The Government is increasingly promoting voluntary action as part of its general orientation toward solving problems using “partnership” approaches.

This guide makes a basic distinction between unstructured voluntary action and structured voluntary action, which are treated separately below. However, both forms share some common advantages and disadvantages.

With unstructured voluntary action, the players involved (including the government) do not attempt to specify or formalize behavioural requirements. There is no attempt to monitor or sanction behaviour. Instead, advertising and provision of training and advisory services are typical elements. This instrument may be particularly useful, therefore, in areas where sociological and psychological factors have a greater impact on behaviours than economic factors. Unstructured voluntary action may also be effective where knowledge, attitudes and general approaches to problems are more important in achieving behavioural changes than requiring strict compliance with specific rules.

Examples

Unstructured voluntary action has been used for regulatory purposes in the following cases:

• anti-drinking and driving advertising and education campaigns
• environmental awareness programs
• “Buy Canadian” promotional campaigns and
• promotion of multiculturalism and anti-racism campaigns

Advantages

Unstructured voluntary action may offer the following advantages; it:

• may have fast results;

• may provide greater flexibility and responsiveness to changing circumstances, thus promoting economic efficiency and preserving the capability for dynamic adjustments to changing market conditions and technological advances;

• preserves incentives for innovation;

• minimizes the government expenditures required for rule-making, monitoring and promotion, and eliminates enforcement costs entirely;

• is less intrusive, and allows greater freedom of choice than command-and-control regulation;

• avoids problems of centralized discretionary decision-making.

Disadvantages

Unstructured voluntary action may have the following disadvantages:

• it may take longer to achieve change;

• it may cost more to monitor success (may not have information that would have been available through the use of such instruments as taxation or regulation); and

• some of the players involved may not consider this approach to be responsive enough.

Factors Favouring Use

The following conditions favour promoting unstructured voluntary action:

• behaviours are determined primarily by social or psychological factors;

• knowledge, attitudes and general approaches to problems are more important in achieving behavioural changes than strict compliance with specific rules;

• it's not feasible to articulate specific rules;

• it's not possible to make rules for every conceivable hazard or potential problem;

• other factors would reinforce pressures for behavioural change;

• opinion leaders favour change and are willing to participate in (and perhaps support) a promotional campaign; and

• the media is interested in the issues and objectives of the promotional campaign.

Contraindicators

The following conditions work against using unstructured voluntary action:

• behaviours are determined primarily by economic factors;
• the players involved want regulatory intervention (e.g., to maintain a “level playing field”);
• specific behaviours are required, and they can be precisely defined; and
• resources are insufficient to execute a promotional campaign properly.

Program Delivery Implications

If you are considering promoting unstructured voluntary action as a method of influencing behaviour, you will want to keep the following points in mind:

• a campaign strategy and workplan will be required;

• substantial financial resources may be required (e.g., for opinion surveys, development of materials, advertising budget, media relations work);

• specialized skills will be required (e.g., opinion polling, market research, design and delivery of training, media relations, writing, editing, translation, distribution, placement of advertising); and

• you will probably have to sustain activities for an extended period of time -- the more significant the behavioural change desired, the longer the promotional effort.

Voluntary action can be structured through instruments such as codes, guidelines and voluntary standards. Although the behavioural requirements are not made mandatory under this alternative, specific rules are developed.

There are no precise definitions that can be used to distinguish between these instruments. The term “code” can be used to refer to both mandatory and voluntary requirements. In the latter case, it is often applied to more general specifications of behaviour (e.g., “Code of Conduct,” “Code of Professional Ethics). Guidelines can be more detailed, but may still deal with broad behavioural requirements (e.g., “Truth in Advertising” guidelines, “Environmental Audit” guidelines).

"Voluntary standards" is a term that is usually applied to highly detailed specifications. While there is considerable confusion about this instrument, the first thing to remember is that voluntary standards are not the same as consensus standards. Voluntary standards are specifications and rules that can be made by anyone.

Consensus standards, on the other hand, are developed through a consensus process. Typically, a standards-writing organization such as CSA or CGSB will bring the players together and shepherd the process. It is entirely possible, however, for the government to act as the facilitator.

Voluntary standards can be either voluntary or mandatory. Likewise, consensus standards can be either voluntary or mandatory, although many of them are referred to in federal and provincial regulations.

There are clear differences between codes, guidelines, and voluntary standards on the one hand, and self-regulation on the other. Self-regulation is often used by the provinces for certain occupations (e.g., lawyers, doctors, engineers, hairdressers, financial counsellors). In these cases, the legislature delegates regulatory authority to an organization representing members practising that occupation. The organization makes rules, levies charges, and applies discipline -- and these have the same force and legal authority as if they were carried out by the government itself. There is nothing voluntary about self-regulation.

Codes and guidelines also specify rules and standards of conduct. The key differences are that they have no legal authority and compliance is not mandatory. In theory, compliance is achieved because the players involved find it in their self-interest to obey the (non-binding) rules voluntarily. Of course, the same holds true for most regulatory programs -- firms find it in their self-interest to obey the (binding) rules voluntarily.

Paradoxically, for businesses, a major problem with codes, guidelines and voluntary standards is that there are no effective sanctions or enforcement mechanisms. Put yourself in their position. Your primary goal is to keep yourcompany healthy and in business. But, if you comply, it will cost you more: your prices will have to go up or your profits will have to drop. You are willing to comply voluntarily, provided your competitors do the same. You can be hurt badly by cheaters. You need, and deserve, a “level playing field”. If there is no way to stop cheaters, you are simply giving unscrupulous competitors a chance to put your employees’ jobs at risk and put you out of business.

So, why do firms comply with codes, guidelines, and voluntary standards? One reason might be their concern about their reputation if it became known that they had violated the rules. Peer pressure may also play an important role.

Codes, guidelines, and voluntary standards can be used where the government is not active in an area. They can also be used to elaborate requirements in an area already covered by regulations. Moreover, as reforms have raised the cost of regulating, regulators are turning to lower-cost substitutes: they are discovering the benefits of bypassing the regulatory approvals system.

In some cases, codes and guidelines are in fact not very “voluntary”. Sometimes departments make it clear that if compliance with codes or guidelines is not satisfactory, the rules will become binding regulations. Some codes and guidelines appear to have been born as draft regulations. Some, particularly those that apply to federal institutions and were authorized by a minister or by Cabinet, may actually be legally binding.

Examples

Examples of codes, guidelines, and voluntary standards developed with the involvement of federal departments include:

• electronic funds transfer service code
• various environmental protection codes and
• advertising code of ethics

Advantages

Structured voluntary action through codes, guidelines or standards may have the following advantages:

• it recognizes the practical limits to the Government's ability to solve problems through detailed intervention;

• it can provide greater speed, responsiveness and flexibility (it may be preferable in markets characterized by rapid product change since voluntary standards can be established and altered more quickly than government regulations);

• it is not subject to constitutional and other legal limitations (it can be used to set national standards and avoid balkanization);

• it is not subject to legal drafting conventions;

• it can suggest, explain, justify, and elaborate;

• it can address areas that are difficult to regulate, such as ethical behaviour;

• it may reduce the cost to government of developing, promoting, monitoring, and enforcing behavioural requirements;

• it can lead to the production of products that are interchangeable and compatible, thus increasing the number of sources of supply, promoting competition, reducing risk, cutting down the size and cost of inventories, raising worker productivity, and enhancing the economies of large-scale operations;

• rationalizing products may lead to increased efficiency through economies of scale in production, inventories, and consumption;

• it may lower the risk of product failure;

• users may perceive a lower risk of product failure;

• it may foster the entry of new products into the marketplace, expand demand, and facilitate international trade;

• it may substantially reduce the amount of information and evaluation required in making a purchase decision, compensating for inequality in the information available to buyers and sellers;

• it may lower costs and increase economic efficiency by improving the rationalization, interchangeability and compatibility of products, and may correct market failure due to production or consumption externalities and the lack of mechanisms for shifting and reducing risk; and

• it may make it harder for firms to differentiate their products and may increase competition based on price.

Note that many of these advantages apply equally to mandatory standards.

Disadvantages

Structured voluntary action, such as codes, guidelines, and standards, can have the following problems:

• it may provide the opportunity and a vehicle for collusive, anti-competitive arrangements among rivals;

• it may be created and administered in a way that favours certain interests (e.g., dominant firms, domestic producers), depending on the relative balance of power among the players involved;

• it may result in behavioural requirements that will not solve the problem that prompted the Government's action;

• it may reduce product diversity;

• it may enable firms to engage in tied selling which would extend their monopoly in one product into the market for a complementary product;

• it may impede innovation and entry of new products into the marketplace;

• it may hinder the development and application of new technologies;

• it may create barriers to trade;

• it may result in lower levels of conforming behaviour;

• the inability to punish cheating would penalize those who voluntarily comply and, if non-compliance continued, would ultimately erode the instrument's effectiveness;

• it may be unfair -- standards may lower costs more for small firms than for larger firms.

Note that many problems apply equally to mandatory standards.

Factors Favouring Use

Codes, guidelines, and voluntary standards may be viable options under the following conditions:

• products or services are complex, relatively costly, and infrequently purchased and have attributes not easily discernible by prospective purchasers (information asymmetry);

• markets are characterized by rapid changes in products;

• quality standards are particularly useful in markets with:

• greater sensitivity to variations in quality

• little elasticity of demand

• low marginal cost of providing quality, and

• not much value placed on poor quality service;

• the industry is organized or controlled well enough by its own members to ensure reasonable adherence to the behavioural specifications;

• the small number of firms involved means that they can be easily identified and can agree individually to adhere to behavioural specifications;

• there is an organization, whose members represent all or nearly all of the firms in the industry, that will take responsibility for promoting the behavioural specifications;

• all affected interests (particularly consumers) are able to participate in developing the behavioural specifications;

• the players involved understand the risks involved in continuing the behaviours contributing to the problem (e.g., health, safety, or environmental areas);

• there is significant potential legal liability for the consequences of the contributing behaviours;

• the players involved perceive the Government to be willing to use regulatory intervention if voluntary action fails;

• industry members and consumers can easily detect cheating;

• independent third-party monitoring and certification programs are available to support the specifications (e.g., CSA, CGSB, UL or ISO 9000);

• competitors and consumers can apply non-legal sanctions (e.g., withdrawing co-operation in other areas such as research; purchasing products of conforming competitors) to punish cheating; and

• in general, if the industry is ripe for collusive behaviour, it is ready for voluntary arrangements.

Contraindicators

Unstructured voluntary action may be neither viable nor desirable in the following circumstances:

• there are many competitors with divergent interests who must agree and modify their behaviour;

• there is significant imbalance in the power of the various players involved to influence the content and application of the specifications;

• imported products account for a substantial portion of the market (it is unlikely that foreign producers will adhere to Canadian voluntary standards);

• there is significant export potential and there are no international standards or comparable standards in trading partner jurisdictions, putting Canadian producers at a competitive disadvantage;

• prospective purchasers can easily detect and evaluate product attributes (less information asymmetry means less justification for product standards); and

• consumers purchase affected products frequently and repeatedly, allowing them to vote with their dollars.

Program Delivery Implications

If you are considering promoting structured voluntary action such as codes, guidelines or standards, you will want to keep the following points in mind:

• to be successful as voluntary measures, codes, guidelines, and standards should be developed through a process that involves all the players involved;

• the Government or other players involved may have to provide various kinds of assistance to ensure that consumer, environmental, and similar interests can participate fully and effectively;

• the Government has a strong interest in the content and application of the voluntary specifications to ensure, for example, that standards do not create unwanted international trade barriers; the Government should probably participate in developing the specifications and monitoring compliance.

Another alternative to regulation is to create new substantive legal rights of action (e.g., tort, fraud, unconscionable contracts, restitution, fiduciary obligations) or to modify procedural law. Adjusting procedural requirements can also create significant incentives.

There are constitutional limits on the scope the federal government has in this area, however. The provinces generally have exclusive jurisdiction over civil law matters, including contract and tort. The provinces also have jurisdiction over civil procedure. The federal government can, however, seek provincial co-operation in making changes to private law rights and procedures. It can also create rights of action, if they are supplementary to regulatory regimes otherwise falling under federal jurisdiction.

Examples

The following are examples of modifications of substantive or procedural private law:

• creating new duties allowing private civil actions for tort, breach of contract, harm resulting from using a product, breach of fiduciary obligations;

• modifying the law on “nuisance” and “trespass” to make it easier for people to recover for losses suffered through environmental pollution;

• changing civil procedures to facilitate class action proceedings;

• altering “standing” rules to allow a broader range of interested parties to take legal action;

• offering intervenor funding or cost awards;

• providing for civil right of action for firms that have been subject to losses arising from anti-competitive activities such as predatory pricing (Competition Act);

• building in civil right of action for parties to recover the cost of environmental clean-ups.

Advantages

Modifying private law rights and procedures may offer the following advantages; it:

• is less intrusive -- allows greater freedom of choice than traditional command-and-control regulation;
• allows greater flexibility and adaptation of desired behaviours; and
• avoids problems of centralized discretionary decision-making;

Disadvantages

Modifying private law rights and procedures may have the following problems:

• it can add a relatively sophisticated tool to an already complex system;

• it may be unfair -- some parties may lack sufficient resources to pursue private lawsuits;

• it may not be economically justifiable for some parties to pursue cases (e.g., where the amount of money at issue in a single case is small relative to the cost of the legal proceedings);

• the adversarial model employed in traditional litigation may not be the most appropriate or effective process for resolving conflicts and modifying behaviour;

• decisions in specific cases may not have broader behavioural impact;

• procedural changes may not fully compensate for the costliness and slowness of private actions in the legal system;

• the parties involved may not consider this approach to be responsive enough;

• it may direct technical issues to courts not qualified to make such determinations;

• the outcome of individual cases is uncertain;

• the general impact on behaviour may be slow;

• it may develop differently in various jurisdictions;

• it can be hard to target accurately.

Factors Favouring Use

The following conditions favour modifying private law rights and procedures:

• the target beneficiaries of change are relatively sophisticated;

• new or modified rights and obligations can be precisely defined in legislation;

• the target behaviour is influenced primarily by economic factors;

• the target beneficiaries have sufficient resources to pursue private legal actions;

• the amount of money involved in each action is sufficient to warrant private legal action by an individual or a firm ; and

• factual issues (e.g., technical or scientific aspects of behaviour or product performance) are not highly detailed or complex.

Contraindicators

The following conditions work against modifying private law rights and procedures:

• the target behaviour is determined primarily by social or psychological factors;
  and

• the amount of money involved in each action would be less than litigants could potentially recover.

Program Delivery Implications

If you are considering modifying private law rights and procedures as a method of influencing behaviour, you will want to keep the following points in mind:

• jurisdictional limitations on federal authority severely restrict using this instrument;

• using this method may make it more difficult for the Government to monitor how much behaviour has changed and to what extent policy objectives have been achieved, due to lack of information that would be available through regulatory or tax systems;

• it may have workload and resource implications for provincial court systems;

• it will require a communications campaign targeted at legal practitioners, relevant business interests, and intended beneficiaries; and

• it may require government funding to ensure that intended beneficiaries can make use of their new rights.

Governments may establish or merely promote insurance schemes designed to protect certain interests (e.g., consumers) against specific risks. Governments may also require that businesses carry private insurance for specified risks as a condition of receiving permission to operate or to carry out particular activities. In the last case, insurance is really a requirement of the regulatory regime, not an alternative to regulation.

Insurance can remove the need for highly detailed command-and-control regulation of product attributes and production processes. It forces businesses to assess risks, to determine cost-effective methods of reducing them, and to ensure that their products are priced to fully cover the cost of protective measures(e.g., implementing the desired behaviours). Insurers may develop more detailed specifications and may carry out monitoring activities. If the insurer does not assess the risk on an individual basis (including claims experience), however, the supplier no longer has a financial incentive to identify and reduce risks. This would significantly minimize economic efficiency.

Examples

The following are examples of insurance regimes:

• home warranty insurance (for homeowners whose buildings have deficiencies);

• travel insurance (protects consumers who have prepaid for trips against insolvent sellers or service providers);

• performance bond or restoration fund for harm suffered from using pesticides;

• worker's compensation insurance;

• manufacturers' warranties for repair of emission control devices;

• performance bonds for reclaiming land after strip mining operations;

• performance bonds for reclaiming land used for disposal of solid or toxic waste;

• performance bonds for reforestation after logging;

• restoration funds for specific health problems or environmental damage (e.g., asbestos-related problems, silicosis, offshore oil spills, PCB or other toxic waste clean-up);

• mandatory professional liability insurance for lawyers, doctors, dentists;

• insurance for carnival rides;

• performance bonds for repairing fish habitat in projects subject to the environmental assessment process; and

• assignment of liability for offshore oil spills and requirement for insurance.

Advantages

Insurance regimes may offer the following advantages:

• they are more transparent -- the cost of regulatory benefit (e.g., cleaner air) is directly reflected in the price of products;

• they allow flexibility and adaptation of desired behaviours;

• they remove problems of centralized discretionary decision-making;

• they can be focused clearly on economic determinants of behaviour;

• they are less intrusive, allowing greater freedom of choice than traditional command-and-control regulation;

• they promote economic efficiency by internalizing costs, by allowing flexibility for dynamic adjustment to changing technologies and market conditions, and by providing strong financial incentives for developing more cost-effective methods of reducing risk;

• they provide prompt and, often, automatic redress for beneficiaries;

• Government authorities may not require as much detailed knowledge of and information about target industries and behaviours; and

• they can significantly lower costs to government of developing, promoting, monitoring, and enforcing detailed behavioural requirements.

Disadvantages

Insurance systems may have the following problems:

• the public may view an indirect method of influencing behaviour as inappropriate;

• they may require auxiliary regulatory requirements to ensure full coverage (e.g., imposing the obligation to take out insurance as a condition of licensing); and

• they may be unfair if the target firms have significantly different abilities to identify and minimize risks or to pay premiums, and may favour larger, more sophisticated businesses.

Factors Favouring Use

The following conditions favour using insurance:

• the target behaviour is influenced primarily by economic factors;

• demand for the goods or products affected is highly elastic, accentuating the effects of the tax on the product's price and the impact on production behaviour;

• would result in fewer tax paying units, reducing the cost of collection and monitoring;

• there are “gates” or natural control points in the affected activities, facilitating collection, monitoring, and enforcement;

• target individuals already have potential tax liability and ability to pay; and

• targets (taxpayers or products) for new or increased tax levies can be easily and precisely identified, facilitating collection, monitoring, and enforcement.

Contraindicators

The following conditions work against using insurance:

• the target behaviour is determined primarily by social or psychological factors;

• there are relatively few suppliers (highly concentrated market) and a highly inelastic demand for the goods or products affected (levels of consumptionare not significantly affected by price changes resulting from pass-through of insurance premiums, and consumers have little ability to shift their business to other suppliers); and

• there are a large number of potential firms requiring insurance, increasing the administrative costs of systems such as restoration funds.

Program Delivery Implications

If you are considering insurance systems as a method of influencing behaviour, you will want to keep the following points in mind:

• some forms of insurance (e.g., performance bonds) are more likely to result in litigation as parties seek to be indemnified; automatic recovery designs may be more efficient and provide more complete coverage;

• premiums must be based on risk to achieve maximum economic efficiency benefits;

• you will need to find efficient ways of collecting the tax or providing the tax reduction;

• you will need to be able to verify and monitor each party's liability and eligibility;

• you will have to be capable of effective audit and enforcement;

• you may need to explain the tax measures; and

• new or existing forms will have to be prepared.