regulatory impact analysis and case studies seán lyons ([email protected]), esri & tcd 18...
TRANSCRIPT
Regulatory Impact Analysis and Case Studies
Seán Lyons ([email protected]), ESRI & TCD
18 November 2011
PS6: Economic & Legal Aspects of Competition & Regulation
Agenda
Part A: The economic background to regulatory impact analysis (RIA)
Part B: Applying economics in regulatory impact analysis
Part C: Assessing the likely effects of regulation on competition
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Part A: The economic background to regulatory impact analysis
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Types of regulation
Broadly, regulation is a government-imposed limitation on the behaviour of individuals or firms.Economic regulation Entry restrictions Price controls
Social regulation Environment, safety, health, consumer
protection, broadcasting content, etc.
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Administrative regulation
Some administrative measures are not regulation in the economic sense, e.g.
“Hypothetical Example 1: Improvements to Health and Safety Protection Arrangements
The four options being considered are:1. Do-nothing;2. Merge Health and Safety Bodies on a Regional
Basis;3. Establish a National Health and Safety Body;4. Make health and safety a direct departmental
responsibility.”
5(From Department of the Taoiseach, 2009, Revised RIA Guidelines.)
Mechanisms for regulatory “quality assurance”
Transparency and consultation rules Independent regulators used in some cases,
normally reporting to Oireachtas Right of appeal/judicial review Review/sunset measures Ex post reviews of regulatory impact
and Ex ante Regulatory impact analysis
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Why evaluate regulation?
Evaluation involves an investment in information about possible measures: It increases the expected payoff from public policy May reduce uncertainty about regulatory outcomes:
important if policymakers or citizen-consumers are risk averse
Other forms of state intervention tend to be subject to formal evaluation; regulation historically is not May impact a bias to regulate – it seems a costless
alternative to policymakers
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The economics of RIA
RIA should be undertaken only up to the point where its marginal cost equals the marginal net social benefit of better regulation
Benefits of RIA: lower policy costs, avoidance of bad measures (or at least delay to them, if deliberation is imperfect), and welfare gains from adoption of more effective regulations
Costs of RIA: administrative costs, delay to good measures that are eventually approved
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Part B: Applying economics in regulatory impact analysis
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The Irish Model
Current model: Dept. of the Taoiseach, Revised RIA Guidelines, 2009 Most primary legislation requires a RIA, secondary legislation covered more
selectively RIA for proposed EU Directives to be done prior to enactment RIAs should be published No systematic ex post review
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Steps in a typical RIA
1. Describe policy context, objective and options (incl. different forms of regulation)
2. Identify costs, benefits and other impacts of each option which is being considered
3. Apply significance filter4. Further analysis of costs and benefits if
required5. Consultation6. Enforcement & compliance issues7. Review provisions
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1. Describe policy context, objective and options
Why are we considering intervention? What is the market failure? What policy options are available to address
it? Including ‘no action’ and non-regulatory
options where relevant When assessing these options, what is the
“counterfactual”
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Matching type of regulation to source of market failure
Market Failure
Remove barriers to entry
Price and quality regulation
Mandatory insurance or USO
Mandatory Standards
Publication or labelling rules
Market Power
Externalities
Imperfect Information
13For more on this see Honohan, P., (ed), 1997, EU Structural Funds in Ireland, A Mid-Term Evaluation of the CSF, 1994 –99, ESRI Policy Research Series Paper 31.
Some possible alternative interventions
No action Deregulation Legal liability/tort Fiscal measures Incentives (e.g. subsidies) Voluntary measures Self-regulation Co-regulation
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Example 1: Levy on incinerators
15AP EnvEcon, 2008, Regulatory Impact Analysis on Proposed Legislation to Increase Levies on Plastic Shopping bags and Certain Waste Facilities, pp. 30-31)
Prior assumptions in terms of reference may determine the results of the RIA:
1) …any proposed change to the levy applying to landfill must be structured with an appropriate differential for the incineration of waste such that no competitive advantage is given to incineration from any proposed change.
2) …a differential for the landfill of suitably stabilised biowaste is to be suggested that would, in conjunction with the change in the landfill levy, support and encourage the development of Mechanical Biological Treatment (MBT) plants within Ireland. The boundaries outlined by the Department in the initial briefing form the overriding boundaries of all assessments within this RIA. [emphasis added]
2. Identify costs, benefits and other impacts of each option
Main likely sources of benefits and costs Correction of market failures (static or dynamic
efficiency gains) Policy costs (+/-) Compliance costs (+/-) Administrative costs (+/-) Effects on competition (+/-) Distributional effects (+/-)
Unintended effects
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Example 2: Regulation of analgesics
Example: Should there be regulation of pack sizes for paracetamol tablets?
Policy problem: people die of poisoning from this class of drugs (4-10 per year from ’87-’90). Risk of liver damage from paracetamol if too much taken
Why are markets failing? Restrictions: max. pack size of 24 for
pharmacies and 12 for other retailers, plus information and packaging rules
17Example taken from Medicinal Products (Prescription and Control of Supply) Regulations 2003
Example 2 continued
Potential alternatives? Benefits, costs and other impacts
Benefits? Costs? Possible unintended effects?
Enforcement, compliance and review
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3. Significance filter to help make analysis level proportionate
Some “significant” measures will need more scrutiny than others Overall impact expected to be substantial Measure is likely to be controversial Impact in a specific area or sector may be
disproportionate
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Specific effects to consider - Ireland
20Source: Department of the Taoiseach, 2005, Report on the Introduction of Regulatory Impact Analysis, p.36.
• National competitiveness;• The socially excluded and vulnerable groups;• The environment;• Whether there is a significant policy change in an economic market, including consumer and competition impacts;• The rights of citizens;• Compliance Burdens, including Administrative Burdens;• North-South and East-West Relations.
Using cost-benefit analysis in RIA
Defining the counterfactual Identifying and estimating costs Identifying and estimating benefits Assessing the expected net impact The role of uncertainty
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Example 3: ComReg introduction of full mobile number portability
Should all mobile operators be required to offer portable phone numbers?
Competition and numbering resource benefits Two options examined Full CBA carried out by consultants, but no mandatory link
to policy development Clear statement of options Expected costs and benefits quantified; incl. some guesses Details of NPV calculations given Sensitivity analysis of main sources of uncertainty
Ref: www.comreg.ie/_fileupload/Publications/jcd50.pdf, odtr0136 and odtr0156.
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Example 4: control of noise in theworkplace – UK
UK Health & Safety Executive - transposition of EC directive intended to protect workers from excessive noise
Excessive noise leads to hearing damage; a factor in 80% of occupational disease claims in UK up to 1997
Data provided on number of people at various avg. weekly exposure levels (excluding effects of hearing protection measures)
Measures include tighter limits on noise and a system of risk assessments and monitoring by firms
23UK HSE, Final Regulatory Impact Assessment of the Control Of Noise At Work Regulations 2005
Control of noise in the workplace ctd. Options relate to areas where Dept. had
discretion over how to transpose:1. Weekly exposure averaging allowed? (4 opt.)2. When will measurement of compliance be required
(3 opt.)3. How often will reassessments be required (2 opt.)4. What will trigger hearing checks? (3 opt.)5. Precise health surveillance requirement (2 opt.)6. Role of doctors (as needed or mandatory) (2 opt.)7. Transition period for music & entertainment? (2 opt.)8. Definition of music & entertainment sector (4 opt.)
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Control of noise in the workplace ctd.
Quality-adjusted Life Years (QALYs) used to estimate value of benefits
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Monetary values for different levels of hearing loss Reduction in QALY Value
10 % 50 dB Hearing loss £4,200 5 % 30 dB Hearing loss £2,100
2.5 % 20-30 dB Hearing loss £1,050 1 % 15-20 dB Hearing loss £ 420
0.25% 10-15 dB Hearing loss £ 105 0 <10 dB Hearing loss £ 0
Control of noise in the workplace ctd. Many options costed in comparison to relevant
preferred option Costs expressed in Present Value terms Compliance costs=noise reduction measures,
familiarisation, noise assessments, info & training for workers
PVs 10 Years 40 Years
Total Costs £478 - 676m £1.13 - 1.94bn
Total Benefits £72m £1.31 -1.39 bn
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Example 5: Hypothetical regulation requiring banks to pass through base rate changes into retail mortgage rates
Policy problem? Market failure? Alternatives? Main costs/benefits
Policy costs (+/-) Compliance costs (+/-) Administrative costs (+/-) Effects on competition (+/-) Distributional effects (+/-)
Unintended effects?27
Part C: The impact of regulation on competition
Regulation is alleged to have a significant effect on competition in many sectors.
If a measure does limit competition, it may be more difficult to remove ex post due to creation of rents
Determining whether a measure is likely to affect competition may require detailed economic analysis
Specialised analysis is costly A specific test may help policymakers focus scarce
analytical resources on the riskiest cases
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Why are competition-reducing regulations adopted?
Competing explanations… Policymakers try to maximise welfare, but may
accept harm to competition in order to attain competing goals; sometimes make mistakes
Public policy is an arena in which interest groups compete for rents (e.g. Stigler, Peltzman, Becker)
Synthesis: institutions matter, but both welfare-improving regulation and capture may occur some of the time
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How regulation can harm competition and welfare
Raising barriers to entry, expansion or exit Direct quantitative restrictions Higher costs, esp. asymmetric ones
Distortion of prices Weakening rivalry
Direct effects: e.g. behavioural restrictions Indirect effects via information: fostering
coordinated behaviour
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Competition filter – UK version
In any affected market, would the proposal: 1. Directly limit the number or range of
suppliers? 2. Indirectly limit the number or range of
suppliers3. Limit the ability of suppliers to compete? 4. Reduce suppliers' incentives to compete
vigorously?
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Example of a “serial” competition filter
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1. Is the measure purely administrative in nature, with no potential effects on economic activities of individuals or undertakings?
2. Does the measure have the object or likely effect of directly limiting the number or identity of individuals or undertakings that can supply particular goods or services, ORDoes it confer exclusive or limited access to resources or facilities that are needed to produce goods or services?
3. Does the measure directly restrict the prices or quantities of any goods or services?
4. Does the measure require or encourage undertakings that compete with one another to exchange or publish significant amounts of information about the prices, costs or usage of the goods or services they sell?
6. Does the measure impose significantly higher costs on some types of actual or potential market participants than others? (These may be start-up, ongoing or exit costs)
5. Is the measure likely to lead to a significant increase (e.g. >10%) in the cost of producing particular goods or services for some subset of market participants, ORAre the affected goods or services subject to rapid technical progress?
Yes
R
Yes
R
Yes
R NR
No
No
Yes
NR
No No No Yes
NR
No Yes
R
1. Restrictions on dentistry profession
UK imposed tight limits on what ancillary professions (e.g. dental hygienists) could do and restricted many dentists from adopting corporate structures
OFT found that these restrictions “had the effect of ’limit[ing] choice, competition and the potential to develop and deliver innovative and better services.”
33Source: OFT, 2003, The control of entry regulations and retail pharmacy services in the UK, A report of an OFT market investigation, OFT 609
2. Price controls on retail banks
Section 149 of Ireland’s Consumer Credit Act imposes price controls on credit institutions
To introduce a service or increase a price, regulator’s prior approval must be obtained
A study carried out for the Competition Authority suggested that this measure damages competition and innovation, and thus reduces consumer welfare
34LECG, 2005, Study of Competition in the Provision of Non-investment Banking Services in Ireland: Report and Recommendations
Other examples
1. Non-Irish qualified pharmacist may not own, operate or manage an Irish pharmacy <3 yrs old
2. New pharmacies may only get GMS contracts if >250m/5km from nearest competitor and no adverse impact on viability
3. Insurance firms must share a common database of claims cost information
4. Detailed annual compliance statement to be completed by directors of all firms
5. The Groceries Order
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Designing regulatory measures - summary
Define the problem clearly Consider choice of regulatory instruments in light of
expected costs and benefits, taking into account All direct and indirect costs and benefits, whether quantifiable
or not, across time and different classes of affected parties Potential interaction with existing instruments Uncertainty associated with likely impact and compliance Specific effects, e.g. on competition and small firms
Gather and use all available evidence, keeping in mind incentives of parties supplying it
But remember that deliberation has costs too36
Some references
Dept. of the Taoiseach, 2009, Revised RIA Guidelines. Goggin & Lauder, 2008, Review of the operation of
regulatory impact analysis. UK National Audit Office, 2009, Delivering High Quality
Impact Assessments. Lyons, 2006, Testing which proposed regulations need
“competition-proofing”, Journal of the Statistical & Social Inquiry Society of Ireland.
OFT, 2007, Completing competition assessments in Impact Assessments: Guideline for policy makers, OFT876. 37