Friday, July 7, 2017

Defining the Public Interest in Regulatory Decisions: The Case for Economic Efficiency

Jeffrey Church, University of Calgary - Department of Economics is Defining the Public Interest in Regulatory Decisions: The Case for Economic Efficiency.

ABSTRACT: Canada’s public utility regulators – in sectors ranging from energy to telecommunications – are under attack. Regulators and their decisions have been subject to withering commentary, hostility, disbelief, contempt and even disobedience.

Many of the concerns regarding regulation arise because their enabling legislation does not clearly articulate the purpose of regulation. The goal of regulation should be to maximize the value of production from Canada’s scarce resources, its land, natural resources, capital, and labour. The only goal of regulation should be economic efficiency: maximizing the wealth of the nation. But, it usually is not.

In circumstances when markets do not deliver efficiency, for instance when firms degrade the environment without paying or have monopoly power, intervention by an independent regulator can promote investment, economic growth, and rising standards of living. For intervention to be more likely to have these positive effects, the sole mandate of the regulator needs to be promoting efficiency.

Instead, many governments provide regulators with a vague mandate to act in the public interest, or multiple, often conflicting objectives. That leaves regulators with far too much latitude to be influenced by lobbying, rent seeking, and political influence. Indeed, to minimize the potential for exchanges between politicians and special interest groups involving favourable policy in return for cash and votes, it is important that governments delegate regulatory decisions to independent regulators (handcuffed by an efficiency mandate), and not leave regulatory decisions to politicians.

Issues such as income distribution are too important for governments to delegate to autonomous unelected regulators. The issue of the appropriate distribution of income, which fundamentally involves taking from one group of citizens and giving to another, should be determined in the political process. Regulatory processes are not a substitute forum for the expression of preferences over the distribution of income and resource development. Some of today’s social frustration with regulation is a result of it being asked to decide whose preferences are more worthy, a task for which regulators are ill-suited. Instead, regulators with an efficiency mandate would focus only on aggregate costs and benefits. Such a renewed focus would have important, beneficial, implications for the practice of regulation.

An advantage to society of an economic efficiency mandate is that a regulator can more readily resist demands that, in the short run, have immediate benefits for some, but in the long run destroy the incentive for investment and wealth creation. It is time that governments across Canada refocus regulators with an explicit and singular mandate to improve economic efficiency.

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