Reg­u­la­tory Mod­els: Ben­e­fits and Draw­backs 1

The Star (St. Lucia) - - LOCAL -

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.

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