Regulation in services

Course 7A

Economic distance

the sum of the costs arising from:

Economic distance between agents in different countries increases

because of:

geographic distance

transport

transaction costs of various kinds - differences in culture, language, etc.

regulatory barriers to the exchange of products and factors of production
across frontiers

low degree of tradability of many services

government policies restricting access to service market by foreign providers

Reductions in economic distance may occur because of:

technological improvements - reduce the cost and enhance the quality of

transport, communications and/or information.
changes in regulatory regimes - policies, laws and regulations that
discriminate against foreign products and producers, or that apply equally to
domestic and foreign producers.

The case for regulation:

The economic case for regulation in

services - market failure attributable to three
kinds of problems:

natural monopoly or oligopoly,

asymmetric information,
externalities.

The social case for regulation is based

primarily on considerations of equity

universal service

Market failures:

natural monopoly or oligopoly - feature of

locational services:

specialized distribution networks

specialized equipment for transmitting or receiving
the service

difficulty of duplicating networks and terminals,

given space constraints.
high barriers to entry associated with large initial
investments.
- services that can be provided competitively must
rely on services provided monopolistically access to the essential facilities that continue to
be monopolistically controlled.

Market failures:

asymmetric information - occurs in a wide range

of intermediation and knowledge based services
buyers - inadequately informed about the true
attributes of sellers
consumers - cannot easily assess the competence
of professionals
remedy - adequate dissemination of information too expensive to communicate the necessary
information to individual buyers =>easier to regulate
suppliers than to educate consumers
regulation of inputs - often amounts to restrictions
on entry into the market.

Market failures:

externalities - market prices do not fully capture the

costs and benefits of the associated transactions
negative externalities:
environmental - providers of transport services or tourism
services
financial services
Prevention - prudential regulation (authorization and licensing
procedures)

positive externalities:
telecommunications - benefits of consumers are higher with
the increase in the number of consumers.
government intervention - interconnection, network
compatibility and effective market entry.

Social case for regulation:

Universal service:
Legea nr. 304 din 4 iulie 2003 pentru serviciul universal i
drepturile utilizatorilor cu privire la reelele i serviciile de
comunicaii electronice stipuleaz urmtoarele:
Art. 3 (1) Dreptul de acces la serviciul universal reprezint
dreptul tuturor utilizatorilor finali de pe teritoriul Romniei de a
beneficia de serviciile din sfera serviciului universal, la un anumit
nivel de calitate, indiferent de localizarea geografic i la tarife
accesibile.
(2) Serviciile incluse n sfera serviciului universal sunt:
a) furnizarea accesului la reeaua public de telefonie, la un
punct fix;
b) serviciul de informaii privind abonaii i punerea la
dispoziie a registrelor abonailor;
c) accesul la telefoanele publice cu plat.

Theories of regulation:

case for regulation - reducing the ill effects of

unrestricted competition in the provision of
services when buyers are misinformed.
There are two major theories of regulation:

public interest theory Stigler regulations serve

the public interest
captured interest Peltzman regulations are
applied in the interest of private groups that are
capturing the regulatory process

Public interest theory of

regulation:
The public interest case for service sector regulation

- to solve market failure problems

service providers - likely to prefer the higher incomes
that result from the control of entry into their
occupation, or from restrictions on competition
between those who are admitted to it.
Regulatory powers:

to achieve anti-competitive goals of the providers of a

service
to protect buyers of the service from lazy or predatory
providers

Regulators - inherent sympathy with the views of

those they are ostensibly regulating

Public interest theory of

regulation:

Service providers - advantages:

likely to be better able to asses the effects of

regulatory actions
will usually be fewer in number than users
will have a greater interest in the conditions of
their occupation
easier for them to organize themselves and pres
for the adoption of their views

Captured interest theory of

regulation:
questions the ready availability of
knowledgeable persons who will act in the
public interest.

members of a regulated industry divert the

powers of regulators to their own purposes.
Services can also be regulated in the interest of
private interest groups that exercise pressure
over regulatory bodies, having as outcome:

forced introduction of regulation where it is not the

case

adoption of less efficient regulatory instruments

Theories of regulation

While it cannot successfully be argued that

economic efficiency always requires a
complete absence of regulation, whenever
regulation is judged necessary, a major
concern must be to ensure that regulatory
powers are not captured by the existing
providers of a service and used to further
their interests

Regulatory tiers:

1. Primary legislation

2. Delegated legislation

statutory rules
disallowable instruments
non-disallowable instruments

3. Quasi-regulation

acts of parliaments

codes of practice where there is a government role

Standards
guidelines

4. Administration of regulations

Forms of government action:

light-handed regulation - codes of practice - fairly low economic

costs, as they do not change the fundamentals of how an
industry operates
heavy-handed regulation - restricting entry to markets substantially alter the structure and operation of an industry, and
is likely to incur relatively large economic costs.
regulation should be the minimum necessary to achieve the
stated objectives:
matters where the potential damage is minimal might best be left
to the market or industry itself to correct;
matters with moderate probability and/or moderate impact may
best be handled by a relatively light-handed regulatory
approach; and
matters with high probability and/or high impacts may warrant
highly interventionist regulation.