The Role of Regulations in Promoting a More Efficient and Transparent System of Regulations

The word “regulation” conjures thoughts of constraint, as in, for example, laws that limit environmental pollution, or rules governing who can own and operate certain types of automobiles. But while the concept of regulation can often seem to diminish choices and freedom, at a deeper level regulations can ensure that civil society has the longevity and quality of life necessary to sustain itself.

Regulations can prescribe or proscribe conduct (“command-and-control” regulation), calibrate incentives (“incentive” regulation), or change preferences (“preferences shaping” regulation). Some examples include limits on air and water pollution, child labor or other employment regulations, minimum wages, food and drug safety and labeling regulations, zoning laws limiting development, and a host of environmental and consumer protection regulations.

Proponents of regulations argue that without them businesses would harm the environment, trample worker rights, defraud consumers, and otherwise damage people’s lives in pursuit of profit. They also point out that if businesses are allowed to do everything they want, competition in the economy will erode and consumer and worker standards will drop, which would threaten the survival of civilization itself.

But critics charge that too many of these regulations are unnecessary, impose unjustified burdens on the economy, and are often designed to favor incumbent firms (supporting “cronyism”) at the expense of new business formation, innovation, and productivity growth. They also argue that a constant stream of new regulations reduces the incentive for businesses to innovate or improve their products, and that the high compliance costs of many regulations drive companies out of business.

In light of these concerns, many researchers have moved away from focusing on the impact of independent government agencies and toward studying how regulation can be shaped more strategically and efficiently in order to maximize its benefits and minimize its costs. The key to minimizing costs is to focus on the design of regulatory policies at the outset, with a clear understanding of policy goals and a rigorous analysis of alternative means of achieving those goals. It is also crucial to have a process for systematic programme reviews that periodically examine the stock of significant regulations against clearly defined policy goals.

The best way to promote an efficient, effective and transparent regulatory system is to commit at the highest political level to an explicit whole-of-government policy for regulatory quality. This should involve the active participation of those affected by, and interested in, regulatory policies in a transparent manner that includes meaningful opportunities to participate in preparing drafts of new regulations and reviewing existing ones. It should also involve a commitment to the objective of ensuring that regulations are comprehensible and accessible, that all distributional impacts are considered, and that net benefits are maximized.

A regulatory system can be characterized as efficient when it avoids duplication and overlap, has transparent decision-making processes, and is easily understandable. The most important tool to achieve this is a thorough, comprehensive cost-benefit analysis. Count-based measures of regulation may be useful, but they are not sufficient. A smarter measure takes into account the complexity of the rules and how much effort it will take to comply. It will often show that less stringent rules are better, but it will also demonstrate that more stringent rules can be justified by their benefits.