Consumer Policy Tools

Background Paper to Creating Confident Consumers

May 2003

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Regulatory Options

If a market-based solution is unlikely to emerge, even with assistance from government, policy makers need to consider whether regulation is necessary. According to the OECD Regulatory Checklist:

Government intervention should be based on clear evidence that a problem exists and that government action is justified, given the values at stake and current government policies; the likely benefits and costs of action (based not on perfect government, but on a realistic assessment of government effectiveness); and alternative mechanisms for addressing the problem. [19]

Even where a significant market failure has been identified, the government should act only where it is feasible and cost-effective to do so.

In considering an intervention, policy-makers may have to balance the merits of alternative interventions. It is unlikely in most cases that any one intervention will be completely effective, so the merits of two or more may need to be compared and trade-offs made. These may include the trade-offs between:

• Cost and effectiveness: one tool may fully achieve a given policy objective, but at very high public and private costs. Another may achieve the policy objective only partly, but at much lower costs. [20]
• Reducing information costs effectively and maximising consumer choice: policy tools that generate information that is costly or difficult for consumers to interpret or access may be counterproductive. Cruder tools that restrict consumer choice (such as bans of hazardous products) may be more successful in lowering information costs. [21]
• Restricting competition and trade, and lowering information costs: because competitive markets are likely to solve many information-related consumer problems on their own, consumer policy tools that have an anti-competitive or trade-restricting effect may be counter-productive. [22]
• Being less competitively restrictive and having higher monitoring or enforcement costs: less competitively restrictive tools can result in more significant costs to establish compliance. For instance, it is generally less costly to verify that a product contains a particular design or device than to determine whether widely varying products meet a given standard of safety performance. [23]
• Enforcement by a government agency and civil liability: under a liability regime (e.g. tort, contract), responsibility for enforcement rests with the individual consumer who is best informed at least cost about the occurrence of a "bad deal" (i.e., the consumer has not made the deal he intended or expected). However, these information cost savings come at the expense of a failure to share the costs of enforcement amongst all consumers who might benefit from enforcement in respect of a particular transaction or class of transaction. This approach is also likely to result in under-enforcement-consumer protection laws that give a private right of action to harmed consumers are notoriously under-used. [24]

What follows is a non-exhaustive list of different kinds of policy tools which may be harnessed to address information-based consumer protection problems.

[19] Supra at note 1, at 14.

[20] Supra at note 3, at 16.

[21] Supra at note 2, at 159.

[22] For instance, licensing directly restricts the number of competitors in the marketplace. Product safety instruments that specify specific inputs rather than requiring products to meet specified safety objectives may exclude competing products from the market, even if they are safe. Requiring certification by a particular body may be competition-restricting if the certification process has subjective or covert protectionist dimensions. Supra at note 2, at 160-161.

[23] Supra at note 2, at 161.

[24] Ibid.

[25] Campbell, A "Self-Regulation and the Media" Federal Communications Law Journal, May 1999.

[26] Supra at note 3, at 16.

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