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Conditions necessary for successful regulation

Here are the conditions a regulator must meet in order to increase general welfare (See discussion in Armstrong & Green (2013):

  1. 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).
  2. Determine in detail how the situation could be changed to the benefit of those affected
  3. Design to produce the intended changes
  4. 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
  5. Resist pressures to modify the rules in ways that would reduce the net benefit (c.f. regulatory capture)
  6. Ensure that those affected by the rules know and understand them
  7. Establish rewards and punishments that ensure that the rules are followed
  8. Establish fair procedures for resolving disputes arising from enforcement of the rules
  9. Change rules when the situation changes (e.g., due to inventions or natural disasters)
  10. 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.

the iron law of regulation

“There is no form of market failure, however egregious, which is not eventually made worse by the political interventions intended to fix it” -- Original source unknown

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