Economic Regulation

Economic Regulation

Economic regulation, a form of government intervention designed to influence the behaviour of firms and individuals in the private sector. Other forms include public expenditures, taxes, government ownership, loans and loan guarantees, tax expenditures, equity interests in private companies and moral suasion. Defined as the "imposition of rules by a government, backed by the use of penalties, that are intended specifically to modify the economic behavior of individuals and firms in the private sector," regulation in general is aimed at narrowing choices in certain areas, including prices (airline fares, minimum wages, certain agricultural products, telephone rates), supply (broadcasting licences, occupational licensing, agricultural production quotas, pipeline certificates "of public convenience and necessity"), rate of return (public utilities, pipelines), disclosure of information (securities prospectuses, content labelling), methods of production (effluent standards, worker health and safety standards), standards for products or services (safety of children's toys, quality of food products, Canadian-content requirements in broadcasting) and conditions of service (requirements to act as a common carrier or not to discriminate in hiring or selling goods and services).

Governments

Governments use economic regulation to improve the efficiency with which society's resources are allocated, to alter the distribution of income and to achieve broad social or cultural goals. Improving economic efficiency may involve the regulation of monopolies, which by restricting output and raising prices may restrict the production of the socially optimal amount of goods or services. Regulation may be used in situations in which costs are not paid by those responsible, eg, the social costs of extensive pollution caused by private firms. Because of interdependencies in the utilization of collectively owned resources, government management is necessary to prevent the overexploitation of such renewable resources as fish, whales and forests; and to prevent overcrowding of the broadcasting spectrum.

Government also imposes regulations to alter the distribution of income partly to prevent monopoly profits and certain kinds of price discrimination, which were the justification offered for the regulation of both the railways in the 19th century and the utilities early in the 20th century. Regulation was an attempt to prevent unjust discrimination and to ensure that consumers were charged "fair and reasonable" rates, terms still used in regulatory statutes. Regulation may also be used to reduce the speed of economic change and the redistribution of income through administrative processes, a justification based on the notion that the public is generally averse to risk and that the marketplace, with its sometimes abrupt changes, unfairly distributes income. Finally, regulation may be used to confer benefits on certain customers at the expense of others.

Social and Cultural Regulation

Regulation has been used extensively in Canada in the pursuit of social and cultural goals, including nation building through the provision of transportation infrastructure (see Transportation Regulation) and the promotion of national unity and cultural identification (broadcasting and Canadian-content regulations; see Canadian Radio-Television and Telecommunications Commission). There have also been attempts to increase domestic ownership of business enterprises by restricting foreign ownership in certain sectors, eg, broadcasting and banking (seeEconomic Nationalism).

Direct and social regulation are conventionally distinguished from each other. Through the former, the price structure (rates, tariffs, fees, etc), the conditions of entry and exit or the level of output are altered. A specific regime of direct regulation is confined to a single industry, although quite a number of industries are subject to direct regulation, eg, airlines, railways, telecommunications, certain agricultural products, pipelines, taxicabs (in most cities) and broadcasting.

Social regulation, on the other hand, is usually concerned with methods of production, attributes of a product or service, or disclosure of information. It typically affects a wide range of industries although its impact on different industries will vary enormously. It includes government rule making on environmental protection, health and safety, fairness (human rights, protection against fraud, deception or inaccuracy), culture (content, language), land use and building codes.

Both the federal and provincial governments exercise significant regulatory responsibilities with respect to environmental protection, natural resources, the marketing of farm products, occupational health and safety, human rights, consumer protection, human health protection, employment standards and financial institutions. As a result, the complexity of economic regulation in Canada is increased. It should be emphasized that the cost of direct and social regulation in expenditures by federal, provincial or local governments is only a fraction of the cost of such regulations to the economy as a whole. The bulk of the costs are incurred by individuals and firms (and their customers) in complying with regulations.

The amount of government regulation has been measured in a variety of ways. For example, researchers have estimated that in Canada 29% of Gross Domestic Product at factor costs was subject to direct regulation in 1978. The comparable figure for the US was 26%, although these measures do not reflect the stringency of the controls, which varies enormously. Another estimate for 1980 described 34% of the private-sector economy as "government supervised or regulated." However, both estimates were done before the liberalization of regulation or deregulation occurred in transportation (airlines, rail freight, trucking), financial services and energy (oil and natural gas prices and exports) in the period 1985-88. In the 1970s, federal regulation increased in both Canada and the US. Of the 140 federal economic regulatory statutes enacted in Canada at the end of 1978, 25 were enacted between 1970 and 1978. An additional 11 had been passed earlier but were re-enacted in the 1970s. More new federal regulatory statutes were passed in that period than were passed between 1940 and 1969. The new statutes were enacted primarily in the areas of environmental protection, health and safety, and consumer protection. However, after 1978 the growth of new regulatory provisions fell sharply as pressures for regulatory reform grew.

Two different kinds of efforts to reform regulation in Canada have occurred in the last decade. The first consists of studies, conducted largely by the federal government or its agencies, focusing on the Regulatory Process, eg, those conducted for the Law Reform Commission, the Institute for Research on Public Policy, the Economic Council of Canada and the Canadian Consumer Council. Official inquiries include those of the Regulation Reference of the Economic Council of Canada; the Parliamentary Task Force on Regulatory Reform (Peterson Committee); and the Royal Commission on Financial Management and Accountability (the Lambert Commission). Generally, all the studies have recommended the requirement of an ex ante review of proposed regulations using cost-benefit analysis, earlier and more extensive consultation, the establishment of a regulatory agenda, the institutionalization of periodic ex post review of existing regulatory programs, the replacement of appeals to Cabinet by government policy directives, clearer definition of regulatory mandates in statutes and regulation, closer scrutiny of proposed new regulations and evaluation of existing ones by the legislature, and the improvement of the access and funding of public-interest groups. In the 1980s, the federal government adopted measures to more carefully scrutinize new regulatory initiatives, including the use of a regulatory calendar. The second kind of effort, which has been largely independent of the first, consists of a series of decisions by regulatory agencies or changes in government policy which have liberalized direct regulation in a number of industries.

The loosening of regulatory constraints and the increase of competition in the airline industry were accomplished first by a series of steps between 1977 and 1979 to remove the capacity restrictions on CP Air, allowing them to compete more effectively with Air Canada; second, under the 1978 Air Canada Act, the crown corporation became subject to the same statutory provisions and regulations as other carriers (until 1959 Air Canada had a monopoly on all transcontinental traffic); third, beginning in 1973, but particularly in the late 1970s, regulations governing both international and domestic charter flights were seriously altered, resulting in rapid growth of charter services; fourth, beginning in 1978 the Canadian Transport Commission permitted Canadian airlines to introduce a variety of discount fares. Fifth, in May 1984 the CTC gave airlines more freedom in setting fares, and reduced the restrictions on entry by new carriers and existing carriers into new routes. Finally, in 1988 new legislation went into effect that virtually eliminated economic regulation of air travel in southern Canada and modified the regulations applied to travel to and from and within the North. Following hearings requested by the minister of transport, the CTC decided in mid-1984 to give airlines more freedom in setting fares, and to reduce the restrictions on entry by new carriers and existing carriers into new routes.

Regulatory and policy decisions that have resulted in a loosening of regulatory restrictions and increased competition in the telecommunications industry stemmed, in part, from technological change. For example, technology has undermined the natural-monopoly rationale for government regulation of the telephone industry. In the 1970s the CRTC began to distinguish between the monopoly provision of transmission services from the supply of terminal equipment, eg, the basic black telephone, data terminals, etc. Following the terminal attachment decisions concerning Bell Canada and BC Tel in the early 1980s, subscribers were able to own their own equipment. As a result, there has been high degree of competition for the supply and maintenance of such equipment. Increased competition has also been greatly facilitated by the CRTC's decision in May 1979 on system interconnection. Customers of CNCP Telecommunications can now enjoy dial access to CNCP's data networks and private-line services. While CNCP cannot offer direct competition with unit-toll, voice long-distance or WATS services, it does offer strong competition for data transmission, private lines and telex services. The greatest barrier to increased competition for long-distance voice transmission is the high fraction of fixed common costs recovered from long-distance rates relative to local rates. In August 1985, the CRTC decided that competition should not be permitted in unit-toll, voice long-distance service, although such competition exists in the US.

While Canada has not experienced as much outright deregulation as has occurred in the US, in recent years a number of significant changes have occurred: grain freight rates were deregulated in November 1983, but some regulation was reintroduced in 1985; oil prices were deregulated and controls over short-term export contracts were removed 1 June 1985; airlines in southern Canada were deregulated in 1988. In addition, there have been some notable liberalizations of a number of types of direct regulation, eg, the Foreign Investment Review Act was replaced by the Investment Canada Act in June 1985; Canadian content requirements for pay-TV were reduced in 1986. At the same time, there are some situations where the scope of regulation has been extended, eg, more stringent Canadian content regulations in broadcasting were implemented in 1983.