Week 5: regulation

• Free market (capitalism) justified by its efficiency in satisfying needs
• Profit represents the contribution a corporation makes to the social good. 
• In a world of voluntary contracts no one has to buy so those who choose to buy must get benefits corresponding with price.

• Assumes that competition is vigorous however there are many monopolies and duopolies 
• Unequal distributions of income may result in poverty for some.

• Generally markets work because the exchanges between corporations, workers and customers are mutually beneficial.
• But there are 2 important cases where profit maximisation is not efficient:
• 1. Where there are externalities that are not paid for eg. pollution and congestion
• 2. Where there exists an asymmetry of info between buyer and seller.
• Eg. the practice of medicine, sued cars, safety of working conditions. 
• Each of these situations may justify the regulation of the market in the direction of greater efficiency.

• Regulation: trade practices act
• Civil law: sue for damages, compensation.
• Taxation: on cigarettes
• Ethical codes

• Most professions have ethical codes to deal with the asymmetry of information problem.
• Those who obey code have an interest in ensuring that others obey code too or are penalized.
• Ethical codes will be useful only if they are widely accepted.
• Their implications for specific behaviour must be clear, and it must be perceived that the acceptance of these codes by everyone involves mutual gain.
• eg. doctor and patient relationship
• Used to work well because there weren't many people and everyone knew each other.
• Can be deregistered.

We need to tailor our way of regulation to what we are regulating Taxation seems a good solution in some cases (eg pollution control) but does not seem to have any relevance for product safety

• External or government regulation of business occurs when business is required to comply with externally enforceable standards of business behaviour
• The Corporations Act 2001
• The Competition and Consumer Act 2010

• The time-lag problem : it is necessary to wait till something bad has happened before anything can be done about it. Can't take pre-emptive action.
• Litigation not suitable for continuing problems: silly to keep on going to court over same problem, eg pollution
• Civil law often not suitable eg costs of pollution low for each individual and so it does not pay to bring action.
• eg. inc fines for speeding trucks may lead to higher prices in food and less for rural.

• Lack of consensus about many values: consensus on protecting environment but not on how to do it.
• eg. Should we use of nuclear energy in the interests of a cleaner planet?

Self Regulation occurs when a business or corporation regulates its own behaviour or when a group of businesses or corporations regulate their own behaviour

Divergence between a corporation’s interests as a competitor in the marketplace and its interests as part of the wider community.

• –as a member of the community the corporation is likely to welcome a cleaner environment, but as a competitor it has an interest in minimizing its pollution control costs.
• corporation has an incentive to free ride.

According to this version of the prisoners dilemma the individual corporation withholds its contribution to the public good because it cannot obtain the assurance that other corporations will contribute their fair share.


We can expect corporations to regulate their behaviour to promote the public good so long as they are assured that other corporations are doing the same.

• Individual corporation level: 
• The central problem here is that the principle means we rely on to regulate corporate conduct in the public interest - the competitive market- undercuts the ability of the corporation to regulate itself in cases of market failure.
• The problem of aerosol products: did not oppose ban on fluorocarbons
• It is not unusual for responsible corporations to seek external (government) regulation so that a level playing field was ensured

• Is self-regulation by a trade association or other industry body a practical alternative to government regulation?
• Problem: this would in contravention of anti trust laws (laws in place to make sure they are competitive)
• Danger is that they will collude to set prices and thus no more truly competitive.

• Problems associated with self-regulation lead us inevitably back to the need for external regulation.
• WHatever the problems with external regulation is more effective than self regulation.
• The challenge is to maximise benefits and minimise the problems associated with the kind of regulation.

• Braithwaite argues that we need a system of regulation that nurtures virtue
• Assumption that corporations will be non-virtuous and treatment by regulators (based on that assumption) will destroy any inclination to go beyond what is required by the letter of the law - moral exhaustion
• Need a dynamic system of regulation that attempts in the first instance to solve problems by persuasion and dialogue

Many (most) models of regulation assume that all those who do not comply are rational but non-virtuous

But there are other categories of non-compliers

–There are those who fail to comply with regulation because they are technically incompetent

• There is also the case of the deterrence trap
• penalties may be too small for advantage gained from non-compliance.
• Why not raise penalty?

• –Because it would bankrupt offending organization, workers would lose jobs etc
• Braithwaite argues that in these cases the deterrence model should be abandoned and incapacitation threatened/ effected

Model of escalating deterrent response

• Advocates trying cheap light hand regulation before heavy hand.
• Start with persuasion or warning letter. 

light handed works because of fear they can provide heavy hand.

• This model economises on motivation - can be responsive to various underlying motivations
• Strategies at the top of the pyramid necessary for the success of strategies further down
• Effective use of limited resources of regulator because the bottom of the pyramid strategies are relatively inexpensive