Conditions Necessary for a Successful Regulation
Here are the conditions a regulator must meet in order to increase general welfare (See discussion in Armstrong & Green (2013):
- Know stakeholders’ endowments, relationships, and preferences. People are unaware of how they make decisions in many areas of their lives—including as consumers—as was shown by Nisbett & Wilson (1977).
- Determine in detail how the situation could be changed to the benefit of those affected
- Design to produce the intended changes
- Design to avoid unintended changes (e.g. graft, reduced competition, and suppression of innovation). “Few men have virtue enough to withstand the highest bidder.”—George Washington
- Resist pressures to modify the rules in ways that would reduce the net benefit (c.f. regulatory capture)
- Ensure that those affected by the rules know and understand them
- Establish rewards and punishments that ensure that the rules are followed
- Establish fair procedures for resolving disputes arising from enforcement of the rules
- Change rules when the situation changes (e.g., due to inventions or natural disasters)
- Keep the administrative costs of the rules below the value of the benefits.
A checklist for regulators and for others who wish to review proposed or existing regulations that is based on these conditions is available here.