RIS QUESTION 2

Why is government action needed?

In this section of the RIS, you must:

  • Clearly identify why there is a legitimate reason for government to intervene.
  • Demonstrate that government has the capacity to intervene successfully.
  • Identify alternatives to government action.
  • Clearly identify what objectives, outcomes, goals or targets you are aiming for.
  • Identify the constraints or barriers to achieving your goal.
  • Ensure your objectives are:
    • specific
    • measurable
    • accountable
    • realistic
    • timely.

Not every problem can be solved by government

Is there a case for government intervention? Is the problem too small to bother with? Is the cost of intervention greater than the potential gain? What is the likelihood of your intervention having the intended outcome? Should the regulator step back and let the market deal with the problem?

Satisfy yourself there is a genuine need for government to take responsibility for the problem. Have governments—Commonwealth, state or local—attempted to fix this problem before? What success did they have? What was learnt from the experience?

There is a generally agreed set of rationales for government intervention. Which one of these best describes your policy problem?

Is there an inefficient allocation of resources? Are there equity issues?

When markets are functioning well, they tend to allocate resources to the most valuable uses. When this doesn’t happen, for example, in the provision of policy outcomes like justice or services in rural or remote areas—there can be good arguments for government intervention, to improve efficiency or equity or both.

Market failure alone is not an argument for government intervention, particularly if the failure does not have a material impact on the functioning of the wider market. But in the event of a market distortion leading to inefficient or inequitable outcomes, the cost of intervention may be justified. Your arguments to support market intervention should rely on authoritative data, both qualitative and quantitative.

Are you addressing a monopoly or abuse of market power?

Regulation may be justified where uncompetitive market structures or anti-competitive conduct lead to inefficient outcomes in the economy. This may occur when there is a monopoly, or a small number of sellers can limit supply in the absence of substitutes or maintain prices higher than would occur in a competitive market.

A range of regulatory interventions is available to government to restore a competitive market or manage a continuing monopoly situation. Monopoly issues can be emotive with a variety of competing interests to balance. Ensure you carefully verify claims made by affected parties on both sides of the debate.

Policy makers should be aware of existing regulations or mechanisms to deal with perceived or actual market failures, monopolies and abuse of market power. The Competition and Consumer Act 2010 provides a range of powers that may well address the problem and make further regulation unnecessary or counterproductive.

Policy makers should look to existing regulations and their actual or potential application before proposing new regulation.

Do we need to correct information asymmetry?

Markets may not allocate resources efficiently if one party in a transaction has significantly more information than another. Sellers and buyers may have an incentive to conceal information in order to obtain a more favourable price or conditions in a transaction, or to dishonestly gain an advantage. Regulatory intervention may be an option to impose the obligation to disclose or certify relevant information.

On the other hand, the internet has the potential to reduce information asymmetry in many transactions and policy makers should consider this in their analysis. Remember that imposing disclosure obligations on a large number of business or community organisations can impose significant red tape burdens—make sure the problem you are trying to fix is large enough to justify the cost of compliance.

Do we need to overcome an externality?

An externality is generated when the economic activity of one organisation generates a positive or negative impact for another without there being a market price associated with the impact. For example, a factory might be polluting a river, making the water unusable for businesses downstream. Another might be a flu vaccination, which reduces the chances of others contracting the flu even though they didn’t have the injection.

Many activities generate externalities-—positive and negative—though the existence of an externality does not on its own justify government intervention. The determining factors include the size and nature of the externality and the likelihood that regulation will generate a more efficient or socially desirable outcome.

Is the market unable to deliver a much-needed public good?

Some goods and services are unlikely to be provided efficiently by the market. Regulatory intervention may be required where a good or service for which there is a clear need is not being provided. There are two types of public good in this category:

  • Non-rivalrous goods and services such as national defence, diplomatic treaties or lighthouses. One person’s usage of these things does not stop others from consuming them. Goods and services such as these are rarely if ever delivered
    by markets.
  • Non-excludable public goods, such as fish in the ocean, or trees on public land, are difficult for private sellers to prevent non-paying customers from consuming. Governments typically regulate access to these goods to create a functional market.

Is the market behaving irrationally?

Behavioural economics tells us that people do not always make rational, considered decisions even in an otherwise efficiently functioning market. For example, even in the presence of penalties or other disincentives, people still pay their taxes late (or not at all), drink and drive, waste water or engage in unsafe work habits. Government may have a role in curbing irrational or socially undesirable behaviour, but regulators should not always assume regulation alone will achieve the desired objective.

Ask yourself: what is the role of personal responsibility?

Is regulation the best solution?

When government intervention may be warranted, policy makers must ensure they consider the complete range of policy levers available to them. Doing nothing can be just as valid a policy solution as any other, and a rigorous cost-benefit analysis should always include this option as a benchmark. You may wish to consider a policy solution based on the techniques of behavioural economics as an alternative to more traditional economic levers of subsidy or taxation.