TOPIC G:
REGULATION &
COMPETITION
TCD M.SC.(EPS) – RONAN LYONS – EC8001
IRISH ECONOMIC POLICY ISSUES & CONTEXT
MODULE OUTLINE
Topic Title
EoI Ch
Dates
A
Irish Economic History to Independence
1+
MT1-2
B
Irish Economic History since Independence
1+
MT3-4
C
The Economy & Economic Growth
2, 7
MT5-6
D
Public Finances, Debt & Taxation
3, 4
MT8-9
E
The Labour Market
6
MT10-11
F
Social Justice & Inequality
8
HT1-2
G
Regulation & Competition
5
HT3-4
H
Competitiveness & Trade
9, 11
HT5-6
I
Health & Education
12, 13
HT8-9
J
Natural Resources & Real Estate
10, 14*
HT10-11
READING & DATA
• Economy of Ireland, Ch. 5
• Other readings
World Bank Doing Business project/dataset
EU Smart Regulation/Impact Assessment website
Forfás Review of the Retail Cap in Ireland (2011)
National Consumer Agency review of consumer behaviour
survey (2013)
• Dublin City Council Development Plan (in particular 20112017)
•
•
•
•
TOPIC G: STRUCTURE
Regulation & Competition
1.
2.
3.
4.
5.
Goals & Means
Costs & Benefits
Competition Policy
Natural Monopolies
Irish Case Studies
AIM OF REGULATION CLEAR
• Ultimate aim of regulation is clear and simple:
• To contribute to achieving the highest standard of living for
the people Ireland – the primary responsibility of
government
• Regulation covers a variety of spheres
•
•
•
•
•
•
Economic
Social
Political
Cultural
Medical
…
GOALS MAY OVERLAP & CONFLICT
• E.g. (1) support for Irish language
• Culturally (and politically) important
• Socially, may exclude “New Irish”
• Economically, opportunity cost of money spent on Irish
• E.g. (2) stem cell research
• Medical regulation
• Social/religious motivations
• Goals of regulation need not be evidence-based
• Nuclear power (vs. turf, coal, other fossil fuels)
• GMO foods (in context of global malnutrition)
IS GMO DEBATE EVIDENCE-BASED?!
• GMO foods
DIFFERENT TYPES OF REGULATION
Control-based:
“You must (not)…”
Information-based:
“Did you know
that…?”
Incentive-based:
“As long as …,
you’re free to…”
ECONOMIC AIMS OF REGULATION
• Reducing set of legal outcomes to socially
acceptable subset (control regulations)
• Reducing imperfect information (info regulations)
• Aligning marginal cost and marginal revenue
(competition policy)
• Aligning private and social costs (externality-based
taxes, subsidies)
• Overcoming behavioural biases (behavioural
economics units)
CONTROL-BASED
• Government created to protect “life, liberty and
the pursuit of happiness”, and arguably property
• Activities that deny others these ‘unalienable rights’
typically banned by government
• Punishments include loss of property (fines), liberty (jail), life
(execution)…
• Society’s agreement on some activities – such as
murder, assault, burglary – is easy
• Significantly more difficult in other areas, e.g. the
criminalization of homosexuality in Ireland
• Cf. goals of regulation – social vs. cultural vs. religious
• Many lesser examples, e.g. traffic lights
CONTROLS ARE UBIQUITOUS
INFORMATION-BASED
• Much of the gap between economic theory and
economic reality stems from imperfect information
• Missing information: important attributes would not
otherwise be measured (e.g. BER rating, NCT for cars)
• Information imbalance: if purchaser has more information
than seller (e.g. application for a business loan), service may
be under-provided – ~Pigovian tax (to correct undersupply)
• Disclosure requirements: ingredients, financial “tied
agents”, APR, drug side-effects…
• Name-and-shame: FSAI closure orders, tax
defaulters, bankruptcies…
INCENTIVE-BASED
• As per topic D (Public
Finances), principal
incentives are via Pigovian
taxes and subsidies
Positive externality
€
• E.g. of taxes: petrol,
tobacco, alcohol
• E.g. of subsidies: vaccines,
education, media
P=MC
P=SMC
• Tax and subsidies need not
be regressive
• E.g. of Swiss speeding law:
% of income
• Cf. two sets of prices –
absolute (€), relative (%)
D
Q0 Q1
Q
Without Pigovian subsidies, market
will under-provide (i.e. misallocate
society’s scarce resources)
INCENTIVE-BASED 2.0
• A new generation of incentive-based regulations
stem from psychology and behavioural economics
• Reflects (non-cost) aversions and biases
• Examples of these include:
•
•
•
•
•
Risk aversion
Loss aversion
Ambiguity aversion
Status quo bias
Inattentiveness
• Cf. growing number of “Nudge” policymaking units
• E.g. opt-out pension contributions or organ donation;
redesigned tax forms
IRISH CONSUMERS EXHIBIT INERTIA
Survey respondents who had switched service
provider within previous 12 months
25%
Those most likely to exhibit
inertia include older people
and those unaware of/not
confident about their rights
20%
15%
10%
Mortgage
Life Insurance
Non-mortgage
Credit card
Savings A/C
Current A/C
Gas supply
TV service
Health insurance
Fixed line
Electricity
Waste provider
Home insurance
Mobile phone
Broadband
Top-up grocery
Gym
Car insurance
0%
Main groceries
5%
Source: National Consumer Agency
INFORMATION-BASED 2.0?
• Less profile than “nudge”
policies has been next
generation of information
regulations
• In Ireland, e.g. of property
price register
• Calorie count laws:
• 2009 law in NY (now in
CA): chains of more than
15 outlets – fine of $2,000
TOPIC G: STRUCTURE
Regulation & Competition
1.
2.
3.
4.
5.
Goals & Means
Costs & Benefits
Competition Policy
Natural Monopolies
Irish Case Studies
SUBSTITUTABILITY OF MEANS
• Suppose policymakers agree to reduce childhood
obesity and target sugary drinks
• Control-based: ban on sale of sugary drinks to U18s
• Information-based: inclusion of sugar content on drink labels
• Incentive-based: sugar tax based on social cost
• Bearing in mind ultimate goals of policymaking and
government (“life, liberty & pursuit of happiness”),
which is the optimal tool?
• Effectiveness vs. appropriateness
• Cf. Singapore’s chewing gum ban (& $500 fine)
• Is there also complementarity across means?
CHILDHOOD OBESITY
• What is the rationale for
regulation?
• Why does it trump “pursuit
of happiness”?
• Cf. responsibilities of
healthcare system
• Immediate vs. long-run
health effects
• Who pays? Behavioural
issues…
• Assuming all three policies
deliver same benefits,
which costs least?
EU IMPACT ASSESSMENT
• European Commission assess the impact of EU
policies, legislation & trade agreements
• At all stages: planning, implementation and review
• Before:
• Roadmaps describing planned initiatives
• Commission impact assessments
• After:
• Initiatives are evaluated against goals
• Simplification, reduction of regulatory burden through REFIT
(Regulatory Fitness and Performance Programme)
• Similar measures required at Member State level
COSTS OF REGULATION
• Direct:
• Regulatory charges (clear – but burden may not be)
• Substantive compliance costs (one-off or recurring – BER vs.
NCT)
• Administrative burdens (e.g. information requirements)
• Hassle costs (harder to measure, e.g. time wasted)
• Indirect:
• Changes in price, quantity or quality of goods
• Reduced competition, market access, investment,
innovation
• Enforcement:
• Monitoring, enforcement, adjudication
BURDEN OF REGULATORY CHARGES
1. Inelastic demand
2. Elastic demand
S+ τ
€
S+ τ
€
S
S
P2
P2
P1
P1
D
tax τ
Q2 Q1
With inelastic demand, a charge
on sellers will fall mainly on buyers:
τ is similar to p2-p1
D
tax τ
Q
Q2
Q1
Q
With elastic demand, buyers have
other options, so a charge on sellers
will cause a change in Q, not P
EU MAP OF REGULATORY IMPACTS
Hungary
Greece
Poland
Spain
Italy
Austria
Slovakia
Portugal
Slovenia
Netherlands
Germany
France
Czech Rep
Belgium
Ireland
Denmark
UK
Sweden
Finland
REGULATORY COSTS CAN BE LARGE
Administrative burden in 2003 (as % of GDP, estimated)
8%
7%
6%
5%
4%
3%
2%
1%
0%
COSTS OF SETTING UP A FIRM
0
Australia
Austria
Belgium
Canada
Chile
Czech Rep
Denmark
Estonia
Finland
France
Germany
Greece
Iceland
Ireland
Israel
Italy
Korea
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Rep
Slovenia
Spain
Sweden
Switzerland
UK
Average
5
% of per capita income
10
15
20
25
2005
2015
ENFORCING CONTRACTS
0
Australia
Austria
Belgium
Canada
Chile
Czech Rep
Denmark
Estonia
Finland
France
Germany
Greece
Iceland
Ireland
Israel
Italy
Korea
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Rep
Slovenia
Spain
Sweden
Switzerland
UK
Average
400
Number of days
800
1200
1600
2005
2015
DISTRIBUTIONAL IMPACT
• Costs of regulation may vary by stakeholder
•
•
•
•
•
Citizens and society as a whole
Consumers
Businesses
Public Administrations
“Third countries”
• Transfers vs. net losses
• As may benefits
• Improved well-being (health, safety environment)
• Improved market efficiency (cost, range, information)
• Indirect benefits
WHEN DOES A FINE BECOME A PRICE?
TOPIC G: STRUCTURE
Regulation & Competition
1.
2.
3.
4.
5.
Goals & Means
Costs & Benefits
Competition Policy
Natural Monopolies
Irish Case Studies
COMPETITION POLICY
“People of the same trade
seldom meet together,
even for merriment and
diversion, but the
conversation ends in a
conspiracy against the
public, or in some
contrivance to raise prices”
Adam Smith, The Wealth Of
Nations (IV.8)
COMPETITION POLICY
• Administered at Irish and EU levels
• Competition Authority of Ireland (now part of Competition
& Consumer Protection Commission)
• DG COMP
• Legal basis is Articles 101-109 of TFEU:
• Cartels, collusion & other anti-competitive practices
• Preventing abuse of ' dominant market positions
• Control of proposed mergers, acquisitions [needs to exceed
certain amount of EU turnover]
• State aid given by Member States to companies
• Companies need not be based in EU to be subject
to its competition law
WHAT IS THE RATIONALE FOR THIS?
ECONOMIC AIMS OF REGULATION
• Reducing set of legal outcomes to socially
acceptable subset (control regulations)
• Reducing imperfect information (info regulations)
• Aligning marginal cost and marginal revenue
(competition policy)
• Aligning private and social costs (externality-based
taxes, subsidies)
• Overcoming behavioural biases (behavioural
economics units)
ROLE OF COMPETITION POLICY
• Encourage the existence of competitive markets
• This often requires the regulation of activities of firms with
significant market power
• Prevention of mergers of two large competitors
• P=MC means allocative efficiency – value placed
by society equals cost to society
• “Correct” amount produced (assuming no externalities)
• P>MC: too little produced
• Also rent-seeking behaviour – designed to protect market
power
MEASURING THE MARKET
• How do you decide the limits
of the market?
€
• Some are well defined
• Ervia vs. SSE vs. Electric
Ireland… but what about
home heating oil?
• Others are much tougher
• Hotel chain in Ireland…
• B&Bs? Hotels in England?
Cruises? Electric Picnic?
• In practice, could firm raise
prices by 5%/10% for a year?
• Elasticity of demand cental
Elasticity & Market power
DPC
DM
Q
IS ACTUAL COMPETITION NEEDED?
• Competitive markets vs.
contestable markets
• Do you need a large
number of firms to keep
price close to MC?
• Example of Airbnb
• If it decided to treble its
fees due to its dominant
market position, what
would happen?
IN DEFENCE OF MONOPOLIES…
• Human taste for diversity (e.g. restaurants, authors;
monopolistic competition)
• Necessary short-term reward for long-term
competition (e.g. ICT)
• May be associated with innovation, R&D (e.g.
pharmaceuticals)
• Economies of scale: what if socially most
appropriate number of firms is one?
TOPIC G: STRUCTURE
Regulation & Competition
1.
2.
3.
4.
5.
Goals & Means
Costs & Benefits
Competition Policy
Natural Monopolies
Irish Case Studies
WHY AREN’T THERE MORE (GLOBAL)
FACEBOOKS?
Registered users (m)
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Google+ Facebook
Twitter
Qzone
Sina
Weibo
Habbo Vkontakte
NATURAL MONOPOLIES
• Defining characteristic: more efficient production
by one firm than by many
• Extreme case of market failure
• Examples include transmission networks and grids
•
•
•
•
•
Electricity transmission
Natural gas
Broadband network
Rail network
Water transmission
NOT BLACK AND WHITE
• What about the following?
• Postal service
• Bus service
• Waste collection
• Waste collection:
• Option A: open
competition (wasteful
duplication?)
• Option B: state monopoly
• Option C: break up
geographic markets,
monopoly in each (but
competition nationally)
NATURE OF THE COST CURVES
• With economies of scale, average cost falls as
quantity provided rises
• This means that marginal cost must be below average cost
• Fixed costs dominate over variable costs
• Sector-specific regulation (regulator)
• Commission for Energy Regulation
• Commission for Aviation Regulation
• Commission for Communications Regulation
• In some instances, price-setting powers
• E.g. CPI-X approach (declining real prices – increased
efficiency?)
POLITICAL TASTES
• Since 1980s, move away from State ownership of
natural monopolies
• Separation and privatisation of contestable activities
• Promotion of competition
• Cf. Topic D (Public finances): NewERA
• Aim is to dispose and restructure state-owned enterprises:
ESB, Ervia (incl. Irish Water), EirGrid, Bord Na Mona, Coillte
• Other State organisations: VHI, An Post, Aer Rianta, BIM,
DAA, SOLAS, National Lottery, RTE, TG4…
TOPIC G: STRUCTURE
Regulation & Competition
1.
2.
3.
4.
5.
Goals & Means
Costs & Benefits
Competition Policy
Natural Monopolies
Irish Case Studies
DEVELOPMENT STANDARDS
• €1500/m2 means €15,000
for extra space
• Roughly €75 extra month
in break-even rent
2-bed
Denmark
• What is the cost per sqm?
Convert that into a
monthly rent…
1-bed
France
• What is the impact on
break-even rents?
90
80
70
60
50
40
30
20
10
0
Ireland
• E.g. DCC’s 55m2 minimum
size for 1-bed
Minimum size requirements
for units
Dublin
• Why would anyone
oppose higher building
standards?
THE MINIMUM WAGE
• Rationale for a minimum
wage?
Minimum wage
€
SL
• Unequal bargaining
power? Cf. illegality of
selling kidneys
w=w*
• Benefit of minimum wage
legislation
• For some, redistribution of
surplus from firm to worker
• Cost of min wage
• For some, unemployment
– price floor mechanism
DL
Q1 Q0 Q2
Q
THE RETAIL CAP
If the retail caps were
abandoned…
Urban
Rural
Effect on competition
Greater?
Less?
Lower margins for all?
Employment effect?
Higher margins for
survivors?
Reduced prices?
Ambiguous?
Retailers
Customers
THE BANKING CRISIS
• Root issues:
• 1995-2007 – Lack of regulation (misunderstood nature of
financial sector within EMU)
• 2007-2010 – No ability to distinguish solvency from liquidity
• Generalist Cabinet Ministers & civil servants
• Unlike Executives in other countries (e.g. US), and
administrations in many other countries
• Where does the expertise from?
• Not an exclusively Irish problem
• But Ireland also the only country to offer unlimited bank
guarantee…
• Importance of minimum possible barriers between
public and private sector labour forces
RECAPPING…
• Economic just dimension to regulation: social,
cultural, political...
• Control, information, incentive based rules
• Assessing the impact: RIA, EU frameworks, World
Bank
• Competition policy, natural monopolies
• - market definition, elasticity of demand
• Plenty of Irish case studies!
ESSAY & EXAM-STYLE QUESTIONS
1. “Those who oppose regulation are placing the
interests of producers ahead of those of
consumers.” Discuss.
2. “Ireland should reduce its administrative burden
by 25% between now and 2020.” How would this
take place in practice? Do you agree?
3. Analyse the regulatory structure, including
rationale and policy recommendations for one of
the following:
1. The cap on the size of retail stores
2. The Irish banking crisis
3. Development standards for new apartments