Transcript Regulatory Impact Analysis and Case Studies Seán Lyons (), ESRI & TCD

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)
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Part B: Applying economics in regulatory
impact analysis

Part C: Assessing the likely effects of
regulation on competition
2
Part A: The economic background to
regulatory impact analysis
3
Types of regulation
Broadly, regulation is a government-imposed
limitation on the behaviour of individuals or
firms.
 Economic regulation
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Entry restrictions
Price controls
Social regulation
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Environment, safety, health, consumer
protection, broadcasting content, etc.
4
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.”

(From Department of the Taoiseach, 2009, Revised RIA Guidelines.)
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Mechanisms for regulatory “quality
assurance”
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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:
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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
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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
8
Part B: Applying economics in
regulatory impact analysis
9
The Irish Model
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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.
2.
3.
4.
5.
6.
7.
Describe policy context, objective and
options (incl. different forms of regulation)
Identify costs, benefits and other impacts of
each option which is being considered
Apply significance filter
Further analysis of costs and benefits if
required
Consultation
Enforcement & compliance issues
Review provisions
11
1. Describe policy context, objective
and options
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Why are we considering intervention?
What is the market failure?
What policy options are available to address
it?
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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
Market Power
Remove
barriers
to entry

Price and Mandatory Mandatory Publication
quality
insurance
Standards or labelling
regulation or USO
rules
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Externalities
Imperfect
Information
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For 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.
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Some possible alternative
interventions
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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
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]
AP EnvEcon, 2008, Regulatory Impact Analysis on Proposed Legislation to
Increase Levies on Plastic Shopping bags and Certain Waste Facilities, pp. 30-31)
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2. Identify costs, benefits and other
impacts of each option
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Main likely sources of benefits and costs
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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
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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
Example taken from Medicinal Products (Prescription and Control of Supply) Regulations 2003
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Example 2 continued
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Potential alternatives?
Benefits, costs and other impacts
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Benefits?
Costs?
Possible unintended effects?
Enforcement, compliance and review
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3. Significance filter to help make
analysis level proportionate
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Some “significant” measures will need more
scrutiny than others
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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
• 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.
Source: Department of the Taoiseach, 2005, Report on the Introduction of Regulatory Impact Analysis, p.36.
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Using cost-benefit analysis in RIA
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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
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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 the
workplace – UK
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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
UK HSE, Final Regulatory Impact Assessment of the Control Of Noise At Work
Regulations 2005
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Control of noise in the workplace ctd.
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Options relate to areas where Dept. had
discretion over how to transpose:
1.
2.
3.
4.
5.
6.
7.
8.
Weekly exposure averaging allowed? (4 opt.)
When will measurement of compliance be required
(3 opt.)
How often will reassessments be required (2 opt.)
What will trigger hearing checks? (3 opt.)
Precise health surveillance requirement (2 opt.)
Role of doctors (as needed or mandatory) (2 opt.)
Transition period for music & entertainment? (2
opt.)
Definition of music & entertainment sector (4 opt.)
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Control of noise in the workplace ctd.
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Quality-adjusted Life Years (QALYs) used to
estimate value of benefits
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
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Control of noise in the workplace ctd.
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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
Total Costs
Total Benefits
10 Years
40 Years
£478 - 676m
£1.13 - 1.94bn
£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
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Policy problem?
Market failure?
Alternatives?
Main costs/benefits
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Policy costs (+/-)
Compliance costs (+/-)
Administrative costs (+/-)
Effects on competition (+/-)
Distributional effects (+/-)
Unintended effects?
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Part C: The impact of regulation on
competition
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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 welfareimproving regulation and capture may occur
some of the time
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How regulation can harm competition
and welfare
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Raising barriers to entry, expansion or exit
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Direct quantitative restrictions
Higher costs, esp. asymmetric ones
Distortion of prices
Weakening rivalry
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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
suppliers
3. Limit the ability of suppliers to compete?
4. Reduce suppliers' incentives to compete
vigorously?
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Example of a “serial” competition filter
1. Is the measure
purely
administrative in
nature, with no
potential effects
on economic
activities of
individuals or
undertakings?
No
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,
No
OR
Does it confer
exclusive or limited
access to resources or
facilities that are
needed to produce
goods or services?
No
R
4. Does the
measure require
or encourage
undertakings that
compete with
one another to
exchange or
publish
significant
No
amounts of
information
about the prices,
costs or usage of
the goods or
services they
sell?
Yes
Yes
Yes
NR
3. Does the
measure
directly restrict
the prices or
quantities of
any goods or
services?
R
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
Yes
participants, OR
Are the affected
goods or services
subject to rapid
technical progress?
Yes
R
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)
No
NR
Yes
No
NR
R
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1. Restrictions on dentistry profession
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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.”
Source: OFT, 2003, The control of entry regulations and retail pharmacy services in
the UK, A report of an OFT market investigation, OFT 609
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2. Price controls on retail banks
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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
LECG, 2005, Study of Competition in the Provision of Non-investment Banking
Services in Ireland: Report and Recommendations
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Other examples
1.
2.
3.
4.
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5.
Non-Irish qualified pharmacist may not
own, operate or manage an Irish
pharmacy <3 yrs old
New pharmacies may only get GMS
contracts if >250m/5km from nearest
competitor and no adverse impact on
viability
Insurance firms must share a common
database of claims cost information
Detailed annual compliance statement to
be completed by directors of all firms
The Groceries Order
Designing regulatory measures - summary
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Define the problem clearly
Consider choice of regulatory instruments in light of
expected costs and benefits, taking into account
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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 too
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Some references
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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.
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