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Assessing Regulatory Alternatives

This guide assumes that you are faced with a problem, that you consider government intervention justified, and that you're trying to find the best way for the Government to intervene.

In this situation, the Government's Regulatory Policy requires departments and agencies to demonstrate that:

1. Government intervention is justified, and regulation is the best alternative.

2. Canadians have been consulted.

3. The benefits outweigh the costs to Canadian governments, businesses and individuals.

4. The regulatory activity impedes as little as possible Canada's competitiveness.

5. Regulatory burden has been minimized through co-operation with other governments.

6. Systems are in place and resources sufficient to manage regulatory programs effectively.

Implicit in the Policy, therefore, is the requirement that alternatives to regulation, and alternative forms of regulation, be fully considered.

This Guide will help you approach the job of assessing regulatory alternatives in an organized and consistent fashion. It is divided into four parts:

	Part 1: How to Find the Best Alternatives
	Part 2: Factors Affecting Behaviour
	Part 3: Alternatives to Regulation
	Part 4: Alternative Forms of Regulation

This Guide is not intended to be read from cover to cover.

First, look at the analytical framework and work through the process in Part 1.

To identify the factors at work (including social, psychological and economic factors), go through the questions in Part 2.

Question 10 of Part 1 asks you to identify alternative instruments that may help solve your problem. At this point, look at the alternatives to regulation in Part 3. For each alternative, you'll find examples and information on advantages, disadvantages, factors favouring use, contraindicators, and program delivery implications.

If you're considering regulation, turn to Part 4 for examples and information on alternative forms of regulation.

This Guide is weighted neither for nor against regulation. Rather, it stresses that combinations of instruments may be required. What it does is provide a structure for analysis to help you find the combination of policy options that will work best.

Other publications, guides, learning aids and brochures are available from Regulatory Affairs & Order in Council, Privy Council Office.

WWW: www.pco-bcp.gc.ca
Publiservice: publiservice.pco-bcp.gc.ca/raoics-srdc
Phone: (613) 943-5076

The Analytical Framework

The analytical framework used in this Guide is built on the following principles:

• regardless of how the Government intervenes, whether by regulating, taxing, owning businesses, or promoting voluntary action, the objective is to solve problems;

• the problems are created by the behaviours of various players;

• so, what the Government really wants is to change the behaviours that contribute to or create the problem;

• however, there are powerful external factors (economic, social, and psychological) that influence how much the behaviours conform with what the Government wants; they may have a much greater impact than any intervention by government;

• the optimal strategy, therefore, is either to strengthen the factors that bring about the desired behaviours (the incentives), or to weaken or eliminate the factors that bring about undesirable behaviours (the disincentives);

• the Government's decision on how to handle a problem should be based on a systematic comparison of possible alternatives.

Question 1. What is the problem?

Question 2. Is government intervention justified?

Consider whether the Government should intervene. The Government can't deal with every problem; why should it get involved in this one? While elected representatives will make the final decision, your work is to inform them -- to analyze the problem, find precedents, and assess the implications of action or inaction.

If you conclude that the Government should be trying to do something, ask yourself, “What do we want to accomplish?” This is the stage where you define the objective in terms of, for example, reducing the risk or injury or sickness to a specified level or range.

As you formulate your objective, remember that even if people followed a standard of behaviour 100 per cent, you probably wouldn't be able to completely eliminate the problem. Particularly for safety and health problems, therefore, you'll want to define the objective in terms of acceptable risk levels. Think about how society views the activity, and to what degree it's willing to tolerate the harm you're trying to prevent. This kind of issue cannot be dealt with simply by applying economic analysis; it requires a political judgment.

Risk Analysis and Regulatory Decision-Making

Risk analysis can be a powerful tool in helping you find the right type and stringency of regulation. But it is only a help -- not the whole solution. Somebody still has to make judgments about how much risk can be tolerated. This becomes particularly important in the area of safety and health regulation.

The noted regulatory expert, W.T. (Bill) Stanbury, has observed that people seem to be more concerned with how they may die or be injured than with how likely they are to die a certain way. Health risks from smoking and drinking are significant and well documented, yet we do not impose extensive or stringent regulatory controls on consumption of tobacco and alcohol. By contrast, workplace injuries seem to bother us more: we have elaborate rules and processes to reduce the risk of this type of harm. Yet even here, the degree of regulatory control is best described as moderate.

A greater contrast is our strong aversion to dying in a plane crash. We go a long way to minimize the risk by regulating such matters as who can fly a plane, how healthy they must be, what training they must have, what level of expertise they must attain, who can offer air services, the design and manufacture of aircraft, and maintenance of the equipment.

Why the differences? A key factor appears to be how much control the individual has over the activity that may cause harm. The more control the individual has, the more we are willing to tolerate higher levels of risk (e.g., smoking). As the individual’s control over the situation diminishes, our willingness to tolerate risk decreases as well (e.g., air safety).

Translating the problem into specific behaviours is a critical step: these are the behaviours you want to change. Make sure you focus on the behaviour, not the problem. For example:

Question 5: Who are the key players?

Remembering that it's people who make decisions and take action, start to define the key players. Who are they? What is their interest in the matter? How are they behaving? The more you know about them, the greater your chances of success. Divide them into two groups: those whose behaviour you want to change and those who may be able to help.

Those whose behaviour you want to change. Identifying these people precisely is very important because different alternatives may work at different levels and on different people. If there are only a few, identify them individually. If there are many, break them down into categories. Consider: geographic location, market-structure, level of production, size of firm, nature of ownership, position in firm, importer or exporter. Work down through the levels within organizations and out into the marketplace. Include owners, directors, officers, workers, advisors, insurers, creditors, debtors, customers, and supporters.

• If the problem were solved, can we identify the people who would benefit? Who are they and where are they located?

• How strong is their individual and collective interest in seeing the problem solved? Do they favour certain approaches?

• Are they organized? Do they have resources?

• Are they in a better position to bring about a change in behaviours? Have they been, or are they likely to be, effective in promoting change?

• How can you strengthen the relationship with these people or gain new allies?

A behavioural profile is simply a way of describing to what extent the various players are engaging in problematic behaviours. It will help you identify the priorities for action if the Government decides to intervene.

It is important to differentiate by categories of players (or by individuals if the group is very small). You may have to group related behaviours together to make the task manageable. You can draw up the profile in words or represent it as a graph.

• What behaviours pose the greatest risk to achieving the Government’s objectives?

• What are the most important targets for government attention, taking into account both the frequency and consequences of the contributing behaviours?

Question 7: What external factors are influencing the behaviours?

A variety of factors influence the behaviour you're trying to change. Although most are external to the Government, they can be influenced to varying degrees by government intervention.

The next step, therefore, is to figure out which factors are working for and which against the behaviour you want. Looking at each behaviour or each group of behaviours, assess whether the following factors are operating as incentives or disincentives to the change you want.

• Do people understand and accept that there is a problem?

• Do they understand and acknowledge their contribution to the problem?

• Do they understand and accept the Government's objectives?

• Do they understand and accept what you want them to do?

• Are they capable of to behaving that way?

• Are social and psychological factors involved?

• Are economic considerations involved?

• Can the Government or other players monitor behaviour, promote the desired behaviour, and sanction non-conforming behaviour?

Part 2, Factors Affecting Behaviour, describes how these factors operate. It also poses questions to help you think about each factor.

At this point, you are translating the objectives into desired changes in behaviour. Either you want people to do more of something they are already doing, or you want them to do less. Often, it isn't a matter of eliminating a behaviour entirely, but of modifying it in some way. Remember to focus on the behaviour, not the objective. For example:

This question builds in a reality check. You need to determine what level of non-conforming behaviour you are willing to tolerate. Remember:

• no matter what the form of government intervention, people probably won't conform to the desired standard of behaviour 100 percent; and

• even if they did, would it automatically mean that you'd achieved your objective?

Question 10: What instruments will best bring about the desired behaviours?

• taxation
• expenditure
• loans and loan guarantees
• user charges
• public ownership
• persuasion
• modification of private law rights and
• insurance schemes

To determine whether one or more of these might be appropriate, work your way through Part 3: Alternatives to Regulation.

If, however, you select regulation, you can look into the alternative forms of regulation listed in Part 4.

At this stage, you are simply identifying possible instruments. Many can be rejected quite easily. For instance, if the minister has said that the Government has no money to spend on the problem, it's a waste of time to seriously consider large-scale expenditure programs. In other words, keep an open mind, but weed out methods that are obviously not viable. Make a note of those approaches you think might be viable based on what you've learned from answering questions 1 through 9.

The most important thing to remember during this first cut is the strategy for the Government's intervention. You want to maximize the benefit gained from the Government's involvement. The best intervention methods will strengthen the factors working in favour of the desired behaviour, or weaken those working against it.

Since this approach relies on, rather than working against, the economic, social, and psychological forces that shape the behaviours you want to change, it is more likely to result in less intrusive types of intervention.

You now have a short-list of possible methods for intervention. The next step is to create a preliminary model of how each alternative would work. This allows you to think through the practical implications of an alternative before conducting a more detailed impact analysis.

For most alternatives, you'll need only a brief outline of arrangements in four areas:

• statement of desired behaviours (behavioural specifications)
• promotion
• monitoring and
• sanctioning

You may be familiar with these categories from modelling regulatory programs, but they also work for non-regulatory alternatives.

• How will you determine and modify the behavioural specifications? Who will be involved?
• Might this be handled through an industry organization or perhaps
• an independent standards-writing body?
• How will consumer interests be involved?
• What form will the specifications likely take?
• Who will approve them?
• How will they be updated?

• How will you promote compliance ? Who will be involved?
• Will government play a role?
• Will the standards body publish them?
• Will educational programs be provided?

• How will you monitor behaviour to determine whether people are complying? Who will be involved?
• Will compliance be self-evident or will some mechanism be required?
• Who will be involved in monitoring: competitors? consumers? governments?

• How will you know if the voluntary approach is working?

• How, and by whom, would non-conforming behaviour be sanctioned? Who would be involved?

Now when the minister asks, “What are our options and how would they work?”, you will have the answers. Logically, the minister's next question would be, “What do you think we should do?" To have the answer ready, you'll want to assess each alternative in more detail, determining its viability and its comparative advantages.

ifferent types of approaches -- regulatory and non-regulatory -- give inherently different levels of assurance that the risk will be reduced. To judge which of the regulatory and non-regulatory alternatives you've identified are applicable and suitable, you'll need to assess each of them according to the following criteria:

• Is it legal?
• Would it be effective?
• Would it be efficient?
• Would it be fair?
• Is it too intrusive?
• How visible would it be?
• How fast can I have it?
• Is it responsive?

a) Is it legal?

b) Would it be effective?

• How would this alternative stengthen or weaken the factors that influence the behaviours contributing to the problem?
• Can this alternative be focused specifically on these factors and the related behaviours?
• Would it be possible to get a broad consensus on the desired behaviour?
• How difficult and costly would it be to detect non-conforming behaviour?
• Would there be meaningful rewards for those whose behaviour conforms?
• Would there be meaningful sanctions for those whose behaviour does not conform?
• On balance, how close would this alternative bring you to the target?

c) Would it be efficient?

• benefits;
• cost to government (incluing costs of participating in voluntary
• arrangements);
• direct private sector¹ and government compliance costs;
• general economic (allocative) efficiency losses; and
• the impact on the ability of relevant markets and participants to adjust over time (including the impacts on productivity and competitiveness).

You need to find out in what direction the balance is tipped, and by how much. At this stage, just try to get a general idea of benefits and costs.

Be realistic: you're not going to be able to reduce everything to a simple dollar comparison. Your analysis will have two parts: quantifiable impacts and non-quantifiable impacts.

d) Would it be fair?

e) Is it too intrusive?

Most people would agree that the Government shouldn't interfere with people’s lives or the affairs of the private sector unless there is a very good reason. The Regulatory Policy reflects this. They would also agree that, even then, interference with individual rights and liberties should be kept to the absolute minimum. There are four facets to intrusiveness: scope, depth, precision and subject:

• Scope: How many people would be affected by this method of intervention?

• Depth: How detailed would the standards of behaviour be? Is this macro- or micro-management?

• Precision: What form would the behavioural specifications take? If, for example, a standard is required, can you get by with a performance specification or will you have to address technical design attributes?

• Subject: What kind of behaviour is being addressed? Is it something that is generally accepted as being the Government’s business, or is it something that is clearly out of bounds?

f) How visible would it be?

g) How fast can I have it?

Most politicians enter public life because they really want to do good things for people. You can assume that they'd prefer to see these good things happen sooner rather than later. The minister will want to know about any significant differences in timing for the alternatives.

You should be prepared, therefore, to indicate how quickly each alternative could be implemented and how long it would take to generate results. For instance, regulation might be more effective, but might take two to three years to implement. A voluntary approach might result in somewhat lower levels of compliance but might be achievable in six to twelve months. What steps would be necessary to implement this alternative? How long would it take? How long would it take to modify the behaviours and achieve the Government's objectives?

h) Is it responsive?

It's possible that ministers and others will reject an alternative that is highly effective, efficient, fair, and speedy. Why? In addition to everything else, the alternative has to be seen to respond to the problem that is being addressed. It should establish that concerns about the problem are legitimate and that there is a need for government involvement.

If the alternative is too complicated to be believed, it won't be. If it doesn't address the contributing behaviours head-on, people will think that the Government isn't serious about fixing the problem. If it isn't tangible, if it doesn't have form, structure, and specifications that define the desired behaviour, it will be viewed as a smoke-screen.

• Does this alternative send a signal that the problem being addressed is real and important?

• Will people be able to understand how it will work and how it will help?

• Will people see it as a direct attack on the problem, or as a side-stepping manoeuvre?

• Does it include a clear specification of the desired behaviours?

• Will there be something tangible (e.g., a set of rules, an institution) that people can point to as evidence of the Government's intervention?

The factors that influence the behaviour you want to modify are likely to be complex and inter-related. Therefore, the best solution will probably be a combination of techniques that work on different aspects of the problem. Most regulatory systems rely on an assortment of techniques to modify behaviour.Activities that promote compliance (e.g., training, public communications, financial assistance) often comprise a major part of a regulatory system. Various forms of requirements are often mixed together in statutes and regulations. For example, licensing systems may control who can provide a product, but they often also incorporate standards and pricing controls.

If you can get what you want without regulation, so much the better. If you can't, perhaps non-regulatory techniques can play a part. What mix of regulatory and non-regulatory instruments would apply the greatest leverage to the factors that influence the behaviours?