Assessing Regulatory Alternatives
Part 2: Factors Affecting
Behaviour
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Question 7 in Part 1 asked you to identify what external factors
are influencing the behaviours you're trying to change. It pointed
out that although most of the factors are external to the
Government, intervention can have an impact on them. To work out
which factors are working for you and which against, try to answer
the following eight questions. If you can answer them, you should be
able to make an informed decision.
Question 1: Do the people involved
understand and accept that there is a problem?
Getting agreement on the problem is a critical first step. Who
thinks there is a problem? What exactly do they think the problem
is? How serious is it? How much do they want it solved?
It may be in some people’s interest to deny that a problem
exists. This is probably because they know what you have in mind as
the solution and they don’t like it. If, however, they know that
you're willing to consider a range of alternative solutions, they
might be willing to take the first step and acknowledge the problem.
Question 2: Do they understand and
acknowledge their contribution to the problem?
Even if people accept that the problem is legitimate, they might not
accept that they are helping create it or that their actions could
help solve it. Again, some may find it in their interest to deny
responsibility. If people don’t believe they are part of the
problem, they won’t see why they should be part of the solution.
Ask yourself:
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What behaviours are creating or contributing to the
problem?
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Who is engaging in these behaviours?
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Do they recognize that they are behaving this way?
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Do they accept that their behaviour is contributing to
the problem?
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Do they accept that changing their behaviour would be a
good idea?
Question 3: Do
they understand and accept the Government's objectives? |
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ccepting the problem is one thing; accepting the objective to be
served by government intervention is something else. People's
willingness to behave the way you want depends on whether they
accept the underlying policy objectives. Ift hey believe that the
Government is pursuing a valid purpose, they are more likely to do
what you want. An important element of any strategy for dealing with
a problem, therefore, is to reinforce the underlying social and
economic objectives of the government action. Issue advocacy,
properly handled, is a valuable and legitimate public policy tool.
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Has the Government clearly stated its policy objective in
relation to the problem?
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Has the Government communicated its objective to the
appropriate people?
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Do these people clearly understand the Government's
objective?
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Do they accept the Government's objective? Do they think
it is fair and reasonable? Do they think it can be achieved?
Question 4: Do
they understand and accept what you want them to do? |
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t is critical that the people involved understand and accept what
you want them to do. If the behavioural standards are unclear, vague
or convoluted, people will have trouble behaving the way you want.
Moreover, people won't willingly comply with rules they think are
unfair.
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Has the Government clearly stated the standards of
behaviour that it believes are necessary to solve the
problem?
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Has the Government communicated these standards of
behaviour to the appropriate people?
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Do these people understand the standards of behaviour?
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Do they agree that if they comply with these standards,
the objective will be achieved and the problem solved?
Question 5: Are
they capable of behaving that way? |
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Some people may not be able to conform to the standards of
behaviour, whether they want to or not. In some cases, the
technology necessary to achieve a certain standard may not be
available. A possibility here is to phase in the specifications in
such a way as to force the development of the appropriate
technology.
In other cases, the behaviour you want may be possible, but
certain firms or individuals may lack the necessary resources,
skills, expertise, or information. Again, a common approach is to
phase in the behavioural specifications, allowing people time to get
their act together.
In both situations, regulators sometimes press ahead with the
requirements, but adopt a compliance strategy (usually unwritten)
that relies on discretion in enforcement. The strategy may even
require consistently turning a blind eye to certain violations of
the law by certain people. This is not only unfair, but it could be
unconstitutional since it amounts to modifying legislative
requirements established by Parliament or by Cabinet.
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Ignoring the cost, is it currently possible for everyone
involved to meet the standards of behaviour?
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What will prevent some people from conforming to them?
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Are things likely to change over time? When?
Question 6: Are
Economic Considerations Involved? |
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conomic considerations are often very powerful influences on the
behaviour you want to change. The general economic situation
provides a starting place for looking at these factors.
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Is the economy booming or in a slump?
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Is unemployment high or low?
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Are profits high or low for products (goods and services)
used in or produced by the people whose behaviour you want
to change?
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Are things likely to get better or worse?
Moving from the general to the specific, identify and assess
economic factors that could directly influence people's willingness
to adhere to the standards of behaviour. Place the primary emphasis
on the communities directly affected by the behaviour. Knowing which
members of a group are operating under significant business risks
can be an important factor in assessing alternatives.
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If those subject to intervention adhered to the standards
of behaviour, how would that affect their competitive
position vis-à-vis any competitors who were not?
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What if most, but not all, of the competitors fell in
line?
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How would conforming affect the competitive position of
small businesses vs. bigger businesses? Would they suffer
more?
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How would conforming affect the overhead or incremental
production costs of individual firms?
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How do people feel about the likelihood and severity of
any monetary sanctions that might be imposed under either
regulation or some other form of intervention? Do they think
the risk is low? Do they think the costs would be offset by
potential gains from non-conforming behaviour?
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How do people feel about the likelihood and severity of
monetary sanctions imposed by the organizations in which
they work (e.g., disciplinary action by managers or owners)?
Do they think the risk is low? Do they think the costs would
be minimal? Does the corporate culture penalize or reward
the contributing behaviour?
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How do people feel about the likelihood and severity of
economic costs arising from legal liability that could be
triggered by non-conforming behaviour? Do they think the
risk is low? Do they think the costs would be minimal?
Question 7: Are
social and psychological factors involved? |
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There is a tendency to focus only on the economic implications of
government intervention: How much will this cost? (The cost of
regulation impedes success.) How much could be gained? (Economic
benefits promote success.) But social and psychological factors may
be far more powerful than we think in shaping behaviour. So, it's
important to step back and examine the social environment.The
behaviours you want could be influenced by changing mores,
demographic shifts, or swings in the political climate.
Psychological factors, which operate at the individual level, can
also have a significant influence on people's willingness to conform
to behavioural norms. The relationship between the people involved
and government authorities is an important related factor. If there
is a sense of partnership, or at the very least asense of trust,
people will be more willing to adhere to the standards of behaviour.
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How do people generally feel about the problem? Does
anybody care?
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What is the media saying about the problem?
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What are politicians saying about the problem?
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Are there any societal changes that could affect the
severity of the problem or the extent to which behaviours
would conform to the specifications?
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Is anyone else tackling the problems in other ways?
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Are there other government policies, programs or
requirements that could affect the behaviour (e.g., federal,
provincial, local, or foreign regulation)?
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Are the culture and values of the community consistent
with the behaviour you want?
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Are the culture and values of the people whose behaviour
you want to change (e.g., owners, managers, and employees)
consistent with the behaviour you want?
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How strong is these people's desire for a favourable
image in the community, the media, or their own
organization?
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To what extent will they be susceptible to peer or public
pressure?
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How do they feel about any sanctions that may exist for
non-conforming behaviour? Do they think the sanctions are
significant or minor? Why?
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Do they feel it likely that non-conforming behaviour will
be detected? Do they think cheaters are likely to get
caught? Why?
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Do they feel it likely that there will be a swift and
sure response to non-conforming behaviour?
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How do they feel about the likelihood and severity of
non-monetary sanctions imposed by their peers, colleagues,
competitors (e.g., disciplinary action by managers or
owners)? Does the corporate culture penalize or reward the
contributing behaviour?
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Do they like to gamble? At what point does the risk of
detection and sanction become intolerable for them?
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Do these people trust us? Do we trust them? Why not?
Question 8: Can
the Government or other players monitor behaviour,
promote the desired behaviour, and sanction
non-conforming behaviour? |
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Even when you make clear the behaviour you want (either in law or
through some other mechanism), there is no guarantee that people
will behave as desired. Their behaviour will be influenced by
whether they think you can monitor their behaviour, promote
conforming behaviour, and apply meaningful sanctions for
non-conforming behaviour. It's important to be very realistic about
this factor, particularly if you are considering regulation. If a
problem clearly requires regulation, monitoring and enforcement will
be necessary. If you don't intend to monitor and to enforce a
requirement, then it's better not to make it a law: make it a
suggestion.
The federal Regulatory Policy requires departments to have
appropriate compliance policies and to have the capability of
putting effective enforcement programs in place. If you are
operating in the health or safety field, failure to monitor or
enforce could result in large damage awards against the Government
for "negligent regulation."
In other words, it's better never to have regulated at all than
to have regulated poorly.
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How visible are the behaviours contributing to the
problem?
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Is it easy to determine if behaviours conform with the
specifications?
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Is it costly?
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Who could monitor the behaviours? How much would it cost?
Do they have the resources? Would they be willing to use the
resources?
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What types of promotional activities might be required to
support the behavioural specifications?
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Who could promote the behaviours? How much would it cost?
Do they have the resources? Would they be willing to use
them?
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What forms of sanctions might be effective in dealing
with instances of non-conforming behaviour?
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Are these forms of sanctions available? Who controls
them? Would they be willing to use them? How much would it
cost? Do they have the resources? Would they be willing to
use them?
Part 3: Alternatives
to Regulation
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Governments use a variety of instruments to reach policy objectives.
This Guide reviews the following well-known (but sometimes
unrecognized) alternatives to regulation:
- Taxation
- Expenditure
- Loans and Loan Guarantees
- User Charges
- Public Ownership
- Persuasion
- Modification of Private Law Rights and Procedures
- 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:
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accelerated write-off of capital cost allowance for
eligible investments in pollution abatement equipment;
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taxes on alcohol and tobacco products to reduce
consumption;
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fuel taxes (carbon content);
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taxes on fertilizers and pesticides;
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taxes on non-returnable and reusable packaging;
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special levies on canned beverages to promote the use of
reusable glass containers;
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customs duties on imports to encourage consumption of
domestically produced goods;
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air and water emissions fees (e.g., NOx emissions);
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deposits for reusable and recyclable containers (a
refundable tax);
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taxes on tires;
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taxes on car air conditioners;
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graduated taxes on cars linked to fuel economy ratings;
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tax incentives for hiring disadvantaged workers; and
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deposits and refunds for beverages containers, tires,
batteries and lubricating oils.
Advantages
Taxation may offer the following advantages; it:
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has the potential to greatly reduce the overall costs to
the economy of achieving a particular regulatory goal;
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can be less costly to administer, if piggy-backed on
existing tax systems or distribution systems;
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can encourage innovation and competition, reduce
government administrative burdens, and provide greater
flexibility in policy-setting;
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generates revenue for the Government;
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is potentially more efficient than regulation -- it
allows and relies on operation of market processes;
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is less intrusive -- it allows greater freedom of choice
than traditional command-and-control regulation;
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is more transparent -- the cost of regulatory benefit
(e.g., cleaner air) is directly reflected in the price of
products;
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allows flexibility and adaptation of desired behaviours;
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avoids problems of centralized discretionary
decision-making;
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can focus clearly on economic determinants of behaviour;
and
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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:
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it can be a relatively sophisticated tool housed in an
already complex system;
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potential claimants may not know about its existence;
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rules governing liability and eligibility can be complex;
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it can be hard to target accurately;
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it may require more precise monitoring than traditional,
detailed regulation;
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it may be difficult to determine the magnitude of the tax
or tax incentive necessary to modify the behaviours;
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claimants accustomed to receiving tax incentives may
develop a sense of entitlement to the benefits, making it
difficult to reduce or eliminate them;
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the public may view an indirect method of influencing
behaviour as inappropriate;
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administration may be comparatively costly, depending on
the number of taxpayers and the need for a new tax system;
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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
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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:
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target behaviour is influenced primarily by economic
factors;
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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;
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there would be fewer tax paying units, reducing the costs
of collection and monitoring;
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target behaviour can be linked to exchange transactions,
facilitating collection, monitoring, and enforcement;
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there are “gates” or natural control points in the
affected activities (facilitates collection, monitoring, and
enforcement);
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co-operation is expected from importers, producers,
distributors, and retailers;
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targeted individuals already have potential tax liability
and ability to pay;
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liability to pay tax can be precisely defined in the
legislation;
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targets (taxpayers or products) for new or increased
taxes can be easily and precisely identified, facilitating
collection, monitoring, and enforcement;
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behaviour requires expenditures on specific, definable
goods or services;
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eligibility for incentives (tax credits or deductions)
can be easily demonstrated by claimants and verified by
government authorities;
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targeted taxpayers are relatively sophisticated;
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targets for tax incentive have sufficient level of tax
liability to make reduction meaningful.
Contraindicators
The following conditions work against using taxation:
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target behaviour is determined primarily by social or
psychological factors;
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target behaviour is not engaged in by players who would
be affected by imposing taxes of extension or tax
incentives;
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products of affected industries are subject to provincial
regulatory control (potential constitutional difficulties);
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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;
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demand for the goods or products affected is highly
elastic,increasing the general economic efficiency losses
resulting from the tax; and
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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:
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you must target the levy or tax reduction precisely to
get maximum impact on behaviour;
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creating a new tax system is costly;
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you need to find efficient ways of collecting the tax or
providing the tax reduction;
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you need to be able to verify and monitor the taxpayer's
liability and eligibility;
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you will have to be capable of effective audit and
enforcement;
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explanatory materials may be required to explain the tax
measures; and
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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:
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grants to reimburse farmers or fishery workers for losses
suffered through crop failure;
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grants to companies for training and hiring disadvantaged
workers;
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government purchase of commodities to stabilize prices
and establish base levels of return for producers;
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the granting of licences (with low royalties) for
government-patented
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processes or products (e.g., anti-lock braking systems)
that facilitate desired behaviour or production of desired
products;
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grants for purchasing pollution abatement equipment;
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grants to homeowners for installing insulation;
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rebates for purchasing energy-efficient light bulbs and
appliances;
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grants for upgrading safety equipment;
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grants or contributions to facilitate voluntary action
(e.g., subsidizing the development of consensus standards or
the setting of international standards);
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grants to cover the costs of switching to new crops or
varieties of existing crops;
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grants to supplement income shortfalls for producers in
the agricultural and fisheries sectors;
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buy-outs of current licence-holders to reduce production
capacity in the fisheries and transport sectors;
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grants for constructing sewage treatment facilities;
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grants to transport carriers to provide service on
unprofitable routes;
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reduced mailing rates for pre-sorted bulk mail;
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procurement policies requiring major suppliers to have
employment equity programs or to use
environmentally-friendly production methods, or the
specification of product standards; and
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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:
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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.
3. Loans and
Loan Guarantees |
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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.
Loan guarantees are a useful way of levering funds from capital
markets for the benefit of a firm that would otherwise be denied
financing or would be obliged to pay uneconomical interest rates.
Both loans and loan guarantees can help elicit a desired behaviour
by reducing the cost of engaging in an activity. These instruments
will be most effective where economic factors (e.g., sufficient
resources) play a major role.
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:
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).
6. Persuasion (promoting
voluntary action) |
|
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.
Unstructured
Voluntary Action |
|
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.
Structured
Voluntary Action: Codes, Guidelines and Voluntary
Standards |
|
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 vs. Consensus Standards |
|
"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.
Voluntary
Standards vs. Self-Regulation |
|
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.
7. Modification
of Private Law Rights and Procedures |
|
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:
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.
Performance bonds, escrows, and restoration funds are common forms
of insurance that can be used as alternatives to detailed
command-and-control regulation. In Canada, there is a growing
reliance on restoration funds. Under this arrangement, suppliers
contribute to a fund through premiums. The fund, which may be
underwritten by government, provides automatic payment to persons
who have suffered loss as a result of specific occurrences.
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.
Part 4: Alternative
Forms of Regulation
|
|
Introduction
How you categorize regulation depends on whether you take an
economic, legal, or political science approach. This guide uses the
following structure to review forms of regulation:
- Direct Product Controls
- Supplier Entry and Exit Controls
- Production Process Controls
- Information Controls
- Marketable Rights
These categories provide a practical framework for identifying
and assessing alternative methods of accomplishing a regulatory
policy objective. They link directly with the analytical framework
outlined in Part I of this guide.
The categories also reflect prevailing views about the
comparative advantages and disadvantages of each form of regulation.
However, the effects of any particular regulatory approach will be
determined by a variety of factors and will vary from case to case.
There is no such thing as inherently good or bad regulation.
There is no single, universally accepted definition of
regulation. Regulatory requirements, like other types of law,
establish rights and duties for individuals. What distinguishes
regulation?
The definition most commonly used in Canada was developed for the
Economic Council of Canada's Regulation Reference (1979):
Regulation, in the generic sense, is defined as the imposition
of rules backed by the threat of government sanctions, with the
intention of modifying or controlling private behaviour. These
rules can be established in statutes, subordinate legislation
(regulations), administrative procedures, orders, directives,
manuals, and, implicitly, in administrative and quasi-judicial
decisions.
The House of Commons Sub-Committee on Regulations and
Competitiveness has proposed the following definition:
In the simplest terms, regulation can be defined as a set of
rules,made and enforced by the state, restricting or specifying
the natureof social and economic activity.
Command-and-Control Regulation
The term “command-and-control regulation” is used extensively,
but there is no generally accepted definition, and it is often used
to denote “bad" regulation.Examples show that this type of
instrument usually specifies both the performance objectives and how
to achieve them. Often, both product characteristics and details of
the production process are covered, and compliance requirements are
specified in great detail.
1. Direct Product Controls
Controls over the price of goods and services are commonly used
in markets where there is a “natural monopoly” (e.g., public
utilities). Firms in these markets have significant market power and
can shift wealth away from consumers. Price controls can be used to
control how much profit these firms make. They are typically used in
conjunction with entry controls such as licensing.
There are a variety of approaches to price regulation.
Rate-of-return regulation, which sets prices so that the firm will
earn no more than a competitive return on equity, is the most common
form used for public utilities. Alternatives to the more traditional
forms are price caps and social contracts.
Examples
The following are examples of products that have been subject to
regulatory price controls:
- telephone services
- transportation services
- electric power
- natural gas
- water and
- cable TV service
Advantages
Price controls may offer the following advantage:
- they protect against abusive use of market power by
monopolistic firms, indirectly controlling profitability.
Disadvantages
Price controls can generate the following problems; they:
- can impede market competition and detract from economic
efficiency in competitive markets;
- can hinder innovation and development of lower-cost
substitutes for regulated products;
- may result in significant shifts of income from consumers to
producers (regulated firms enjoy a comparative advantage in
dealing with regulatory systems); and
- can result in high administrative costs for both regulatees
and the Government.
Factors Favouring Use
The following condition favours using price controls:
- the relevant market is characterized by natural monopoly.
Contraindicators
The following condition works against using price controls:
- the relevant market is characterized by workable
competition.
Program Delivery Implications
If you are considering price controls as a form of regulation,
you will want to consider the following points:
-
it will likely mean that an independent tribunal with
significant infrastructure requirements (including
analytical and legal capability) will have to be
established; and
-
it will require detailed procedures for receiving,
processing, and adjudicating applications for price
adjustments.
Direct product controls may also set limits on the quantity of a
product that can be produced. These limits are usually implemented
through quota systems. They provide an indirect method of
maintaining price levels and of ensuring the profitability of firms
in markets where entry is controlled through regulation.
Examples
The following are examples of where direct regulatory controls
have been used to limit quantiy.
Advantages
Product quantity controls may offer the following advantages:
-
in markets characterized by a natural monopoly, they can
help ensure a supply of product to all customers; and
-
they protect against abusive use of market power by
monopolistic firms, indirectly controlling pricing and
profitability.
Disadvantages
Product quantity controls can create the following problems;
they:
- can impede market competition and detract from economic
efficiency in competitive markets;
- can hinder innovation and development of lower-cost
substitutes for regulated products;
- may result in significant shifts of income from consumers to
producers (regulated firms enjoy a comparative advantage in
dealing with regulatory systems); and
- can result in high administrative costs for both regulatees
and the government.
Factors Favouring Use
The following condition favours using product quantity controls:
- the relevant market is characterized by a natural monopoly.
Contraindicators
The following condition works against using product quantity
controls:
- the relevant market is characterized by workable
competition.
Program Delivery Implications
If you are considering using product quantity controls as a
method of influencing behaviour, you will want to keep the following
points in mind:
-
it will likely mean that an independent tribunal with
significant infrastructure requirements (including
analytical and legal capability) will have to be
established; and
-
it will require detailed procedures for receiving,
processing, and adjudicating applications for changes in
production limits.
This type of control is a common form of command-and-control
regulation. Product attributes (e.g., size, appearance, content,
quality, durability, safety, purity) are controlled through
standards. These standards may be very general (often stated as
general prohibitions in regulatory statutes or performance standards
in regulations), or they may be highly detailed ( technical
standards).
From an economic point of view, standards can do both good and
bad things.Standards control the product, but they also provide
information about the quality of a product or its compatibility with
that of complementary goods or processes.They can increase
productivity and competitiveness by reducing costs or increasing the
rationalization, interchangeability and compatibility of products.
Competitive markets work best when both suppliers and consumers have
sufficient information to make informed choices. When suppliers or
consumers do not have the information they need, the market may
fail. Because standards provide information, they can play an
important role in correcting such market failures. These redeeming
features of standards will become even more important in a global
marketplace where production becomes more interconnected.
On the flip side, standards can increase costs, impede innovation,
and limit consumer choice (by excluding lower quality but less
expensive alternatives from the market). Even more important,
perhaps, people tend to depend on the Government for quality
assurance, and have a diminished sense of personal responsibility.
It is important to distinguish between technical standards and
performance standards.
Technical, or design, standards specify exactly how to comply
with specifications for product attributes. This type of
command-and-control standard is generally considered to be
undesirable from an economic point of view. It locks intechnology,
reduces consumer choice, and can create a barrier to innovation and
to entry by new suppliers. On the other hand, such standards do
provide highly specific information about what a supplier must do to
comply with them. Knowing exactly what the law requires is important
to businesses.
Examples
Technical standards that specify exact means of compliance for
product attributes have been used in the following areas:
- consumer packaging and labeling
- drug safety
- medical devices
- quality of seeds and
- consumer product safety.
Advantages
Technical standards for product attributes may offer the
following advantages:
-
they lower the cost to purchasers of obtaining and
evaluating information about competing products;
-
they provide exact information about the behaviours
necessary for compliance;
-
they diminish uncertainty about what constitutes
compliance for regulatees, other players involved and
regulatory authorities;
-
they may lessen the cost of monitoring compliance
(inspection can focus on verifying whether specific
equipment or a particular design is present);
-
producing products that are interchangeable and
compatible can increase the number of sources of supply,
promote competition, reduce risk, cut down the size and cost
of inventories, raise worker productivity, and enhance the
economies of large-scale operations;
-
rationalizing products may lead to greater efficiency
thorough economies of scale in production, inventories and
consumption;
-
they may cut 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
-
they may make it harder for firms to differentiate their
products, and may increase competition based on price.
Disadvantages
Technical standards for product attributes may have the following
problems:
-
they can impede innovation by locking in technology;
-
they reduce consumer choice by diminishing product
differentiation;
-
they can hinder innovation and entry of new suppliers
into the marketplace;
-
they may create barriers to trade;
-
they may be unfair -- standards may lower costs more for
small firms than for larger firms;
-
inspectors may require more training and expertise to
assess compliance with highly detailed technical
requirements.
Factors Favouring Use
The following conditions favour using technical standards as a
method of controlling product attributes:
-
products or services are complex, relatively costly and
infrequently purchased by consumers; prospective purchasers
are not able to easily detect attributes (information
asymmetry);
-
regulatees want or need more detailed information and
certainty about what behaviours conform;
-
market or products are not subject to rapid technological
change; and
-
independent third-party monitoring and certification
programs are available to support the specifications (e.g.,
CSA, CGSB, UL or ISO 9000).
Contraindicators
The following conditions work against using technical standards
as a method of controlling product attributes:
-
market or products are subject to rapid technological
change;
-
imported products account for a substantial portion of
the market (it is unlikely that foreign producers will
adhere to Canadian specifications);
-
economies of scale in production are coupled with
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 and can therefore vote with their dollars.
Program Delivery Implications
If you are considering using technical standards as a method of
controlling product attributes, you will want to keep the following
points in mind:
-
it may require significant resources and program
infrastructure to support promotion, monitoring, and
enforcement functions;
-
inspectors may require more training and expertise to
assess compliance with highly detailed technical
requirements;
-
it may require special powers and procedures for Customs
to interdict non-conforming imported products.
Performance standards set out the results or objectives to be
achieved. They do not specify exactly what a supplier must do to
comply with the standards, e.g., what technology must be used. The
supplier must still meet a target, but can choose what method to
use.
The standard, for example, may set a test of strength or some
other objective performance feature for the product. The government
may also set a design standard that requires a specific technology
to be used but, at the same time, allows an equivalent means to be
used. This permits the regulated firm to propose an alternative
technology. The standard may also propose choices of technologies or
approaches to compliance that are deemed to be equivalent. In each
of these cases, the regulated firm has a choice about how it will
comply, and may use or invent the least costly means of complying.
Examples
The following are examples of performance standards that specify
product attributes:
- energy efficiency standards
- building fire-safety standards
- fuel economy standards
- food safety standards
- consumer product safety standards
- automobile safety standards
- packaging standards and
- package design standards for transporting radioactive
material.
Advantages
Performance standards may offer the following advantages as a
method of controlling product attributes:
-
they may lower the risk of product failure;
-
users may perceive a lower risk of product failure;
-
they may foster the entry of new products into the
marketplace, expand demand, and facilitate international
trade;
-
they 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;
-
they are less intrusive and more flexible (regulatees are
free to choose -- or invent -- the least costly method of
achieving regulatory requirements;
-
they minimize obstacles to competition;
-
they can produce more flexible, results-oriented policy
than design standards;
-
the flexibility and choice offered by performance
standards can produce significant cost savings for business;
and
-
they provide continuing incentives for innovation
(regulatees benefit from finding less expensive methods of
achieving compliance).
Disadvantages
Performance standards may have the following problem as a method
of controlling product attributes:
-
they may impede innovation and entry of new products into
the marketplace;
-
they may hinder the dvelopment and application of new
technologies;
-
they may create barriers to trade;
-
they may be unfair -- standards may lower costs more for
small firms than for larger firms;
-
they may not communicate as much information about what
must be done to comply and may raise the cost of compliance;
-
they may create uncertainty, which may be a concern for
both regulatees and beneficiaries;
-
monitoring compliance may be more difficult and more
costly.
Factors Favouring Use
The following conditions favour using performance standards:
-
products or services are complex, relatively costly and
infrequently purchased by consumers; prospective purchasers
are not easily able to detect attributes (information
asymmetry);
-
independent third-party monitoring and certification
programs are available to support the specifications (e.g.,
CSA, CGSB, UL or ISO 9000);
-
at least one method of meeting the performance objectives
is known and is feasible;
-
the industry or products are characterized by rapid
technological change.
- 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.
Contraindicators
The following conditions work against using performance
standards:
-
imported products account for a substantial portion of
the market (it is unlikely that foreign producers will
adhere to Canadian specifications);
-
economies of scale in production are coupled with
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);
-
consumers purchase affected products frequently and
repeatedly and can therefore vote with their dollars;
-
abstract conceptualization or speculation about new
technology is required to identify and describe performance
objectives; and
-
the regulatory goal has a highly subjective element
(e.g., being “aesthetically pleasing” or not producing a
“bad smell”.
Program Delivery Implications
If you are considering using performance standards as a method of
influencing behaviour, you will want to keep the following points in
mind:
-
when it is difficult to measure performance objectively,
it will be harder to write the standards;
-
inspection and enforcement in particular may be harder to
administer;
-
it may appear to give competitive advantages to larger or
more sophisticated firms; and
-
it may require special powers and procedures for Customs
to interdict non-conforming imported products.
2. Supplier
Entry and Exit Controls |
|
If you determine who is allowed to supply a product, you are in a
good position to control other matters such as price and product
attributes, as well as production activities. Typically, licensing
is used to control entry to, and exit from, a market. It has been
used to restrict the number of people using a common property
resource (fisheries, broadcasting); to limit entry to natural
monopolies (local telecommunications); and to facilitate control and
monitoring of supplier activities in competitive markets (air
transport, truck transport).
Permits are a variant of supplier control. While they are seldom
used to restrict entry, they provide a handy mechanism for exerting
detailed control over production-related activities (e.g., use of
pesticides).
Self-regulation is type of supplier control. Self-regulation
regimes usually have several options: entry control through
licensing, standards for services, controls on production activities
and, when they can get away with it, price controls.
Entry controls are essential to protecting common property
resources and true natural monopolies. In other situations, it is
better to look for other alternatives. If entry controls really are
necessary, there are “benign” variants that interfere less with
the competitive processes -- auctioning the licences, using
marketable rights, or certifying instead of licensing.
A true certification regime is really a form of “information
regulation”, although it can result in de facto barriers to entry.
Under certification, entry to a market or carrying on an activity is
not restricted. However, you must meet qualifications (training,
experience) that are set out in standards before you can be
certified. A certification regime provides a lot of information
simply and at low cost.
Examples
The following are examples of areas in which entry and exit
controls have been applied:
- commercial and recreational fisheries
- local telecommunications
- long distance communications
- cellular telephone service
- broadcasting facilities
- cable TV service
- transportation services
- professional services and
- agricultural production
Advantages
Entry and exit controls may offer the following advantages:
-
they make it easier to monitor compliance and to impose
detailed behavioural controls (including information
requirements); and
-
they facilitate control over consumption or use of common
property resources (e.g., fisheries, air, water).
Disadvantages
Entry and exit controls may have the following problems:
-
they can seriously distort competitive markets,
protecting entrenched interests, impeding innovation, and
blunting the pressure for cost reduction and productivity
enhancement;
-
they may result in significant shifts of income from
consumers to producers;
-
they can result in high administrative costs for both
regulatees and government.
Factors Favouring Use
The following conditions favour using entry and exit controls:
Contraindicators
The following condition work against using entry and exit
controls:
- workable competition in the relevant market.
Program Delivery Implications
If you are considering using entry and exit controls as a method
of influencing behaviour, you will want to keep the following points
in mind:
-
it will likely mean an independent tribunal with
significant infrastructure requirements (including
analytical and legal capability) will have to be
established; and
-
it may require extensive decentralized monitoring to
identify unauthorized suppliers (e.g., unlicensed truckers).
3. Production
Process Controls |
|
In the third category of command-and-control regulation, the
focus is on controlling the inputs used in the production
process or the attributes of the processes themselves.
In the latter case, for example, effluent controls are designed
to stop companies from consuming too much clean water. Workplace
safety controls are designed to make employers and employees take
action to reduce the risk of injuries.
In some cases, the objective in controlling aspects of production
is to control the product itself (e.g., sanitation standards). In
other cases, the objective is to control both the production process
and the product (e.g., controls on the use of pesticides).
Like product controls, production controls use both technical and
performance standards. In these cases, however, the requirements
provide only marginal informational benefits. For more information
on how to decide when control of production process attributes may
be appropriate, see the discussion under Direct Product Controls:
Product Attributes.
Technical, or design, standards can be used to spell out exactly
how to comply with specifications for the production process. This
type of standard is generally considered to be undesirable from an
economic point of view. It locks in technology, and can create a
barrier to innovation and to entry by new suppliers. On the other
hand, the standards do provide highly specific information about
what a supplier must do to comply with them.
Examples
Technical standards that spell out exactly how to comply with
specifications for the production process have been used in the
following areas:
- occupational safety and health
- Workplace Hazardous Materials Information System (WHMIS)
- marine safety
- air transport safety
- highway transport safety and
- transportation of dangerous goods
Advantages
Technical standards for the production process may offer the
following advantages:
-
they provide exact information about the behaviours
necessary for compliance, reducing uncertainty among
regulatees, other involved players and regulatory
authorities;
-
they may lessen the cost of monitoring compliance
(inspection can focus on verifying whether specific
equipment or a particular design is present);
-
where process standards are intended as an indirect
control over product attributes, they 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
-
where process standards are intended as an indirect
control over product attributes, they may make it harder for
firms to differentiate their products and lead to increased
competition based on price.
Disadvantages
Technical standards for production processes may have the
following problems:
-
they can impede innovation by locking in technology;
-
where process standards are intended as an indirect
control over product attributes, they may reduce consumer
choice by diminishing product differentiation;
-
they can hinder innovation and entry of new suppliers
into the marketplace;
-
they may create barriers to trade; and
-
inspectors may require more training and expertise to
assess compliance with highly detailed technical
requirements.
Factors Favouring Use
The following conditions favour using technical standards as a
method of controlling production processes:
-
when process standards are intended as an indirect
control over product attributes: products or services are
complex, relatively costly and infrequently purchased by
consumers, and prospective purchasers are not easily able to
detect attributes (information asymmetry);
-
regulatees need or want more detailed information and
certainty about what behaviours conform;
-
production processes are not subject to rapid
technological change; and
-
independent third-party monitoring and certification
programs are available to support the specifications (e.g.,
CSA, CGSB, UL or ISO 9000).
Contraindicators
The following conditions work against using technical standards
as a method of controlling production processes:
-
production processes are subject to rapid technological
change;
-
where process standards are intended as an indirect
control over product attributes: imported products account
for a substantial portion of the market; and
-
economies of scale in production are coupled with
significant export potential and there are no international
standards or comparable standards in trading partner
jurisdictions, putting Canadian producers at a competitive
disadvantage.
Program Delivery Implications
If you are considering using technical standards as a method of
controlling production processes, you will want to keep the
following points in mind:
-
it may require significant resources and program
infrastructure to support promotion, monitoring, and
enforcement functions; and
-
inspectors may require more training and expertise to
assess compliance with highly detailed technical
requirements.
Performance standards for production processes set out the
general attributes of the process. They do not specify exactly what
a supplier must do to comply with the standards, e.g., what
technology must be used. This permits the regulated firm to propose
an alternative method of compliance. The standard may also propose
choices of technologies or approaches to compliance that are deemed
to be equivalent. In each of these cases, the regulated firm has a
choice about how it will comply, and may use or invent the least
costly means of complying.
For example, a performance standard for a production process may
state that the maximum allowable limit of asbestos fibres that can
be ingested by workers is x per hour. The standard does not specify
whether this is to be achieved by removing the source, installing
air filters in circulation systems, increasing fresh air
circulation, limiting the workers' exposure, or having employees
wear protective devices or breathing equipment.
In the environmental area, a performance standard may specify that a
plant may emit a maximum of x parts per million of NOx over a
certain time period. Again,the standard does not specify whether
this is to be achieved by cutting back production, using cleaner
production technology, using different inputs (e.g.,cleaner coal),
or using scrubbers or other end-of-stack abatement technology. In
both cases, the regulated firm chooses how it will comply and has an
incentive to continually seek more cost-effective solutions.
Examples
The following are examples of production process standards using
performance standards:
-
occupational safety and health standards (e.g., walkways
and hazards that may cause falls); and
-
air and water pollution controls (e.g., plant-wide bubble
policy).
Advantages
Performance standards may offer the following advantages as a
method of controlling production processes:
-
they are less intrusive and more flexible (regulatees are
free to choose -- or invent -- the least costly methods of
achieving regulatory requirements);
-
they can produce more flexible, results-oriented policy
than design standards;
-
the flexibility and choice offered by performance
standards can produce significant cost savings for business
by making it possible to use a more cost-effective method to
achieve compliance; and
-
it provides continuing incentives for innovation
(regulatees can benefit from finding less expensive methods
of achieving compliance).
Disadvantages
Performance standards for production processes may have the
following problems:
-
they may not communicate as much information about what
must be done to comply, and may therefore raise the cost of
compliance;
-
it may create uncertainty for both regulatees and
beneficiaries;
-
it may be more difficult and more costly to monitor
compliance with performance standards since inspection can
no longer focus on simply verifying whether specific
equipment or a particular design is present (and inspectors
may require more training and expertise).
Factors Favouring Use
The following conditions favour using production process
performance standards:
-
where process standards are intended as an indirect
control over product attributes: products or services are
complex, relatively costly and infrequently purchased by
consumers, and prospective purchasers are not easily able to
detect attributes (information asymmetry);
-
independent third-party monitoring and certification
programs are available to support the specifications (e.g.,
CSA, CGSB, UL or ISO 9000);
-
at least one method of meeting the performance objectives
is known and is feasible; and
-
the production process is characterized by rapid
technological change.
Contraindicators
The following conditions work against using production process
performance standards:
-
imports accounts for a substantial portion of the market;
this may place Canadian producers at a competitive
disadvantage;
-
economies of scale in production are coupled with
significant export potential and there are no international
standards or comparable standards in trading partner
jurisdictions; this may place Canadian producers at a
competitive disadvantage;
-
abstract conceptualization or speculation about new
technology is required to identify and describe performance
objectives.
Program Delivery Implications
If you are considering using performance standards as a method of
controlling production processes, you will want to keep the
following points in mind:
-
when it is difficult to measure performance objectively,
it will be harder to write the standard;
-
inspection and enforcement, in particular, may be harder
to administer; and
-
it may appear to give competitive advantages to larger or
more sophisticated firms.
4. Information Controls
Pure
Information Disclosure Requirements |
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This form of regulation requires that information about the
attributes of a product, process, or situation (e.g., dangerous
working conditions) be disclosed. The information usually appears in
a standardized format, a result of labeling requirements,
advertising controls, or disclosure statements. A disclosure scheme
can either substitute for, or supplement, other forms of regulation.
Because it does not regulate by setting a standard for the product,
production processes, inputs, prices, or allocation of goods, it is
a more desirable alternative to command-and-control regulation.
While the requirements will state what matters are to be covered in
the disclosure, the content of the disclosure depends on the actual
circumstances where the good or service is produced.
Examples
The following are examples of pure information disclosure as a
form of regulation:
- automobile gas consumption ratings
- tobacco tar and nicotine ratings
- requirements for securities prospectuses
- warnings on cigarette packages
- Workplace Hazardous Materials Information System (WHMIS)
- grading and labeling of tires
- energy efficiency labels for appliances
- food grading
- food product labeling and
- information disclosure requirements for drugs
Advantages
Using pure information disclosure requirements may offer the
following advantages:
-
it is less paternalistic than traditional
command-and-control regulation;
-
it can enhance competition and promote economic
efficiency;
-
it preserves incentives for innovation;
-
it may promote high quality goods, services and
practices;
-
it is less intrusive;
-
it facilitates the buyer's choice by reducing the cost of
gathering and evaluating information (e.g., informed buyers
can better compare products, assess substituting one for
another, and select those having the desired characteristics
at a given price);
-
it makes certain products available that otherwise might
not be safe for distribution to the public;
-
compliance costs may be lower (cost of providing
information is generally outweighed by such factors as the
flexibility permitted in production processes and design
choices); and
-
it minimizes the cost to the Government of developing
behavioural specifications, and promoting, monitoring, and
enforcing them
Disadvantages
Pure information disclosure may have the following problems:
-
the public may consider that this indirect method of
attacking the problem is not responsive enough;
-
it may not result in sufficient change in behaviour;
-
it may take longer to achieve the desired change in
behaviour; and
-
it may be difficult to determine the information that
will be useful to, and used by, prospective buyers.
Factors Favouring Use
The following conditions favour using pure information
disclosure:
-
lack of information about the risks or attributes of a
product has been identified as a key factor influencing
behaviour of users (e.g., consumers or workers);
-
products or services are complex, relatively costly and
infrequently purchased by consumers; users are not easily
able to detect attributes (information asymmetry);
-
products or processes are subject to rapid technological
change;
-
risk levels are moderate or lower;
-
effects of poor choices are ambiguous or hidden; and
-
no firm has a sufficient incentive to disclose
information.
Contraindicators
The following conditions work against using pure information
disclosure:
-
risks to health or safety are high;
-
relevant attributes of products or processes are easily
detected and evaluated (less information asymmetry means
less justification for mandatory disclosure);
-
effects of poor choices are visible and unambiguous;
-
changes in behaviour resulting from the provision of
improved information would be too slow to meet expectations;
-
imported products account for a substantial portion of
the market (it is unlikely that foreign producers will
adhere to Canadian disclosure specifications); and
-
consumers use affected products or are exposed to the
processes frequently or repeatedly, allowing them to vote
with their dollars.
Program Delivery Implications
If you are considering using pure information disclosure
requirements as a method of influencing behaviour, you will want to
keep the following points in mind:
-
the regulator should have a sophisticated understanding
of the regulated businesses' processes;
-
you must identify the target audience accurately;
-
you must determine the amount and type of information
that would be useful and would actually be used by those
receiving it, and must consider problems such as incomplete
or imbalanced comparative information, overly technical
details, and use of jargon;
-
you must consider the appropriate form of the disclosure
(information must be easily available to the target
audience);
-
you must consider the potential unintended consequences
of information disclosure (e.g., incomplete or overly
technical information about the risks of a drug's side
effects);
-
you will have to be capable of monitoring and enforcement
(including decentralized monitoring in the marketplace or
workplaces);
-
it may require you to communicate how significant the
information is and how to use it; and
-
it may require special powers and procedures for Customs
to interdict non-conforming imported products.
Restrictive
Information Controls |
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Some forms of information control regulation are hybrids,
incorporating restrictions on products and processes. For example,
standards may require that products be graded, and that the grade be
disclosed; they may also prohibit products from being sold if they
do not fall within the specified categories. Food standards may
prohibit a product from being sold under a particular name if it has
not been produced according to a specified process.
These types of regulatory requirements are primarily
informational in nature. They are intended to simplify and control
product information and to ensure that it is provided to the
purchasers. However, such controls accomplish this objective, in
part, by placing restrictions on the products themselves. To this
extent, restrictive information controls share some of the
advantages and disadvantages of standards.
Examples
The following are examples of restrictive information controls as
a form of regulation:
- grading standards
- composition standards and
- some forms of labeling
Advantages
Restrictive information controls may offer the following
advantages:
-
they are somewhat less paternalistic than traditional
command-and-control regulation;
-
they can enhance competition and promote economic
efficiency;
-
they are less intrusive;
-
they facilitate choice for the target audience by
reducing the cost of gathering and evaluating information
about competing products;
-
product rationalization may lead to increased efficiency
through economies of scale in production, inventories, and
consumption; and
-
they may make it harder for firms to differentiate their
products and may increase competition based on price.
Disadvantages
Restrictive information controls may have the following problems:
-
they may reduce consumer choice and product
differentiation;
-
they may impede innovation by locking in the technology
necessary to meet inherent product restrictions;
-
they can hinder innovation and the entry of new suppliers
into the marketplace;
-
they may create barriers to trade; and
-
inspectors may require more training and expertise to
assess compliancem with highly detailed technical
requirements relating to product characteristics.
Factors Favouring Use
The following conditions favour using restrictive information
controls:
-
products or services are complex, relatively costly and
infrequently purchased by consumers; users are not easily
able to detect attributes (information asymmetry);
-
the market or products are not subject to rapid
technological change; and
-
independent third-party monitoring and certification
programs are available to support the specifications (e.g.,
CSA, CGSB, UL or ISO 9000).
Contraindicators
The following conditions work against using restrictive
information controls:
-
the market or products are subject to rapid technological
change;
-
imported products account for a substantial portion of
the market (it is unlikely that foreign producers will
adhere to Canadian specifications);
-
economies of scale in production are coupled with
significant export potential and there are no international
standards or comparable standards in trading partner
jurisdictions, putting Canadian producers at a competitive
disadvantage;
-
users 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 using restrictive information controls as
a method of influencing behaviour, you will want to keep the
following points in mind:
-
it may require substantial program resources for
developing and updating regulatory requirements;
-
it may require special powers and procedures for Customs
to interdict non-conforming imported products;
-
the regulator should have a sophisticated understanding
of the regulated businesses' processes;
-
you must identify the target audience accurately;
-
you must determine the amount and type of information
that would be useful and would actually be used by those
receiving it, and must consider problems such as incomplete
or imbalanced comparative information, overly technical
details, and use of jargon;
-
you must consider the appropriate form of the disclosure
(information must be easily available to the target
audience);
-
you must consider potential unintended consequences of
information disclosure (e.g., incomplete or overly technical
information about the risks of a drug's side effects);
-
you will have to be capable of monitoring and enforcement
(including decentralized monitoring in the marketplace or
workplaces); and
-
you may need to communicate how significant the
information is and how to use it.
One form of “market-friendly” regulation is the marketable
rights regime. Marketable rights to engage in a restricted activity
or to use a scarce resource are created by the government and can be
bought and sold. Once the rights are distributed, market forces
control the activity or use. The size of allocation might be based
on a natural scarcity or limitation (e.g., the radio spectrum) or
might be imposed by government (e.g., the total population density
in a downtown core).The original allocation of the rights can be
handled by the government in various ways: through a lottery or
auction, or on an historical or first-come, first-served basis. Once
the market is created, the government may act as a broker or trading
may be almost totally private. The newly created market identifies
which users place the highest value on the right.
These regimes typically employ a mixture of command-and-control
measures (including entry controls and production control standards)
and mini-infrastructure regulations. They are by no means
non-regulatory. They are designed, however, to use market forces.
Harnessing them successfully achieves economic efficiencies and
provides innovative, lower-cost methods of complying with regulatory
requirements.
Examples
The following are examples of situations in which marketable
rights could be used:
- air pollution controls
- water pollution controls
- allocation of air wave frequencies
- urban development (building permits)
- water rights
- fishing quotas
- export controls and
- import controls.
Advantages
A marketable rights regime may offer the following advantages:
-
it can reduce administrative costs to government by
relying on the marketplace to make decisions (e.g.,
regulators might need less information about abatement
technology options);
-
it may lower compliance costs for regulatees by removing
the need for certifying production processes and
technologies);
-
it provides flexibility for the Government to adjust the
use of a resource (e.g., by creating more rights, or by
purchasing rights and then removing them from the market);
-
it can remove the Government from difficult, contentious,
and lengthy decisions about who can best use scarce
resources;
-
it is less intrusive -- it allows firms the flexibility
to decide how to achieve a regulatory objective, provided
they meet the goals and targets established by governments;
-
promotes economic efficiency and innovation -- it creates
incentives for developing innovative and cost-effective
methods of meeting requirements (a firm that becomes
especially efficient in its use of a scarce resource or
level of restricted activity can sell surplus rights);
-
greater flexibility allows regulatory objectives to be
achieved at a lower aggregate compliance cost (e.g., allows
regulatees with the lowest abatement costs to reduce
discharges even more instead of requiring all sources to
meet the same pollution standard);
-
provides a continuing economic incentive for firms to
engage in the desired behaviours and therefore to develop
and implement new technologies and processes;
-
makes it feasible to set more ambitious regulatory goals,
or encourage faster achievement of objectives, than is
possible through other forms of regulation;
-
can be used to achieve multiple environmental objectives
more easily than would be possible with other forms of
regulation (the approach is based on recognition that the
company involved, not the regulator, is in the best position
to make a judgment as to the least-cost method of achieving
compliance);
-
can more easily accommodate entry of new firms into, and
growth within, an industry, without generating an increase
in the use of a resource (new firms can be allowed to enter
an industry provided they acquire the necessary permits from
existing participants). Under a command-and-control
regulatory system without entry controls, consumption of the
scare resource would increase. Imposing entry controls would
have adverse economic efficiency consequences;
-
improved cost-effectiveness can result in faster and more
extensive behavioural change; and
-
may generate greater support for adopting more stringent
behavioural requirements if economic instruments are
available (allows firms more flexibility in adapting their
operations to meet requirements).
Disadvantages
Marketable rights may have the following problems:
-
some players may object to the idea of the Government's
granting and allowing the sale of rights to pollute;
-
market failures may prevent the system from operating as
planned (requires constant monitoring by regulatory
authorities); and
-
they may require entry controls and more extensive
support of the monitoring and enforcement functions.
Factors Favouring Use
The following conditions favour using marketable rights:
-
a permit system is suitable for controlling the problem
(i.e., the problem is related to over-use of a resource, the
need for allocation to potential users, or insufficient
compensation for consumption of a resource);
-
it makes no difference who the user of the controlled
rights is;
-
the market itself must be free of major structural
defects and have enough potential traders to allow the
rights to be traded efficiently.
Contraindicators
The following conditions work against using marketable rights
regimes:
-
the relevant market has few participants;
-
the target market is characterized by significant
information deficiencies, hindering exchange transactions;
-
the identity of the users is important (e.g., Aboriginal
fishing quotas); and
-
there is a significant imbalance in the wealth of market
participants, possibly resulting in unfair redistribution of
rights through the market process.
Program Delivery Implications
If you are considering using a marketable rights regime as a
method of influencing behaviour, you will want to keep the following
points in mind:
-
the regulator must be able to determine the overall
number or level of rights;
-
the regulator must be capable of keeping track of who
holds the rights;
-
it may take several years to develop healthy markets and
trading systems for rights;
-
the Government will have to determine the features of the
permit (is it permanent or temporary, based on units or
stratified by priority or class of ownership?);
-
the Government will have to determine the initial
allocation scheme (auction, lottery, distribution based on
“grandfather” provisions or a hybrid scheme);
-
the Government will have to expend resources on designing
establishing, and operating such features as public
education, brokers, and “gatekeeping” functions;
-
the Government will have to establish or maintain a
supporting regulatory system, including rule-making,
monitoring, and enforcement functions;
-
market defects, including uncertainty perceived by
participants, concentration of permit ownership, and market
thinness can complicate the establishment and operation of
the system;
-
institutional barriers (e.g., disputes over initial
allocation, interest in maintaining the status quo, and
controversy over the “correct” number of permits) may
complicate establishment of the system;
-
changes in the value of property rights may result in tax
liabilities (you must determine tax treatment); and
-
it may require entry controls and setting eligibility
requirements for firms that want to enter the target
markets.
Notes
1 The
Business Impact Test is a tool you should consider using to
determine the impacts of a proposal on the private sector. It allows
you to collect and analyze specific insights directly from
stakeholders. Contact Regulatory Affairs, TBS, for more information.
Funding for the original guide was provided by the Department of
Agriculture and Agri-Food, Solicitor General Canada, Transport
Canada, and Treasury Board of Canada Secretariat. |
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