Discussion Paper Summary

August 1999

The Economic Context of the Ministry of Consumer Affairs

The microeconomic management of the New Zealand economy has changed markedly since 1984. Today there is much less direct intervention by government and a greater reliance on voluntary transactions in a market environment for which government actions provide a context. The Ministry of Consumer Affairs, established on 1 July 1986, is one of the agencies charged by government with administering this policy framework. This paper discusses the principles relevant to the discharge of the Ministry’s economic responsibilities within the framework.

At the core of the economic changes in regulatory policy has been the political vision that voluntary transactions are preferable to transactions resulting from government directions. Economic theory provides guidance on how to ensure that the outcomes of voluntary transactions are efficient, in the sense of maximising aggregate material prosperity. (In economics, transactions encompass production activities.)

The underlying economic analysis that has influenced the changes in the regulatory environment over the last two decades derives from:

• the Marshallian partial equilibrium paradigm (named after British economist Alfred Marshall), which looks at transactions in a single market; and
• the Walrasian general equilibrium paradigm (named after French-Swiss economist Leon Walras), which looks at how markets interact.

From Marshall’s and Walras’s work are derived two key normative principles (known as the Marshallian-Walrasian normative principles):

• prices in an economy should include, whenever possible, the cost of all the resources involved in the transactions
• transactions should be left to private decisions, with a minimum of constraints on the participants.

There are a few exceptions, for defined social reasons, to the principle that transactions should be voluntary. However, the vast majority of transactions are left to individuals in a market context. Nonetheless, economists have long recognised that the Marshall-Walras account of economic transactions analysis is incomplete, insofar as it underplays the significance of transaction costs. In particular, different institutional arrangements lead to different transactions, different outcomes and different levels of overall economic efficiency.

Transaction costs include the costs of obtaining the information necessary for the transaction, the immediate costs involved in the transaction and the costs which arise as a consequence of the transaction, including monitoring, redress and enforcement (should the transaction subsequently ‘go wrong’). Transaction costs can be described as ‘the costs of running the economic system’ or ‘the friction in the economy’.

One approach to incorporating transaction costs into economic analysis derives from the pioneering work of British-American economist Ronald Coase. The normative principle associated with this work is called the ‘Coasian Normative Principle’ (CNP), which states that ‘interventions should be structured to remove impediments to voluntary transactions, especially by reducing transaction costs’.

Insofar as the application of the Coasian Normative Principle is successful, market outcomes will conform more closely to those predicted by the Marshallian-Walrasian normative principles, with the beneficial consequences of efficient use of resources and higher material output.

An important means of implementing the Coasian Normative Principle is to provide a comprehensive legal framework, with well-defined property rights where those rights can be exercised at low cost. For example, one aim of consumer credit law is to reduce transaction costs, including information costs. This is to the ultimate benefit of all consumers and those who provide goods purchased on credit, as well as for reputable providers of credit.

Certain limited direct interventions may also have a role in reducing transaction costs. For instance, by having an authority ensure and enforce standards for weights and measures, consumers will be more confident about the terms of potential purchases and more willing to undertake the purchasing transaction.

Many of the economic activities of the Ministry of Consumer Affairs are concerned with the costs of transactions. Notably, different regulatory arrangements can have very different transaction costs. As a rule, the Ministry aims to minimise total transaction costs, to the benefit of both consumers and businesses. The Ministry might be said to be concerned with ‘providing oil’ to minimise the friction in the economic system.

A major objective of the Ministry of Consumer Affairs, in its policy advice and its operational activities, is to remove impediments to voluntary transactions and to minimise the costs of transactions between consumers and businesses.

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Policy Papers series

This paper complements previous papers in our Policy Papers series. 

Other titles in this series are:

Assessing Costs and Benefits in Consumer Policy Development

Mandatory and Voluntary Product Standards

Market Self-regulation and Codes of Practice