Regulatory Models: Benefits and Drawbacks 1
The types of regulation we discussed last week – self-regulation, light and heavy - are not limited to industry, time or even country. And they each have their benefits and drawbacks. Why a certain model is chosen over another usually arises out of the reasons for and the desired outcomes of regulation. Often, the choice is a compromise between the benefits and drawbacks of one system, with the aim of achieving certain objectives. There are many benefits to self-regulation, which as we defined in our last column, is where the industry or sector is regulated by participating entities. They include a reduction in government costs since the regulatory authority is not managed by the state. A regulatory authority that is managed by industry insiders is usually more flexible than government, functioning without the red tape or bureaucracy that usually accompanies state-led entities. In addition, the self-regulatory authority can advocate to the state on behalf of its members. Self-regulation also allows industry partners to educate the public about their work, meet social commitments, and inculcate ethical and other standards among members since the industry’s very success depends on the actions of those who are responsible for it. Self-regulators are also responsible for sanctioning industry partners and determine their own offences and penalties. Such self-regulatory mechanisms tend to work best in highly competitive industries or sectors, where the competition between the players helps to drive innovation, efficiencies and best prices, and where customers have easy access to redress (handling of complaints). The drawbacks to having an industry be self-regulated include the cost private entities have to bear in maintaining it as well as a conflict of interest from industry insiders being responsible for their own success and the success of other industry players who are essentially their competitors. A system of self-regulation may lead to weak sanctions though a narrow interpretation of rules and regulations and a lack of transparency especially to the general public they serve. In both benefits and drawbacks, “light regulation” shares a number of commonalities with selfregulation. This is because both types are defined by a lack of state oversight over industries. This is not the case for “heavy regulation” where it is often the state or independent authority that provides oversight and dictates what an industry can do through the use of laws and sanctions and the enforcement of rules and regulations as well as control over licenses. The benefits of such regulation include all industry partners operating within the same principles, codes of conduct, service standards, sanctions and penalties that are set and applied by the regulator. Heavy regulation via a state agency can increase costs to government or the tax payer, or if such costs are transferred to the entities being licensed and regulated, they increase operating costs and are likely to be passed on to customers. Heavy regulation can also impede growth and innovation because laws are slow to accommodate changes in the market and technology. This type of regulation also runs the risk of overregulating an industry, but is usually favoured for industries or sectors that are natural monopolies or where economies of scale discourages competition or limits the number of players in the industry or sector.