Consumer Policy Tools

Background Paper to Creating Confident Consumers

May 2003

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Government Regulation versus Market-Based Solutions

Government regulation and market-based solutions are not necessarily mutually exclusive. There are many variations of co-regulation that may be considered relating to respective responsibility for rule-making and/or enforcement adjudication. For example, a private association may be involved at the legislation stage by developing a code of practice, while leaving enforcement to the government, or the government may establish regulations but delegate enforcement to the private sector. Sometimes government will mandate that a private association adopt and enforce a code of self-regulation. Often, a private association will engage in self-regulation in an attempt to stave off government regulation. Alternatively, self-regulation may be undertaken to implement or supplement legislation. [47]

Self-regulation will generally be favoured where:

• private parties have a significant comparative advantage in information: either due to specialist technical knowledge or greater capacity to assess the relative costs and benefits of different rules
• flexibility is important: if there is a need to take into account exemptions and exceptions or provide for frequent change of rules over time
• the industry is a cohesive group and is easy to demarcate
• there is a high level of consensus within the industry on the need to improve standards and the standards it wants to promote
• the problems can be fixed within the industry: the industry is not dependent on outside players to assist with the solution
• participation is important to achieve compliance.

Government regulation will generally be favoured where:

• there is a misalignment between private and public goals, which may mean private parties do not have incentives to act consistently with public goals
• the public sector will have a comparative advantage in enforcement through making rules mandatory and having powers of compulsion
• there may be concerns of anti-competitive conduct through rule-making by private parties.

[47] Supra at note 24.

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