Regulatory Impact Analysis and Case Studies

Seán Lyons (sean.lyons@esri.ie), 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 RIA1. Describe policy context, objective and

options (incl. different forms of regulation)2. Identify costs, benefits and other impacts of

each option which is being considered3. 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?

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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 examples1. 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.

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