week 12: competition & regulation: review · 2019-09-05 · •ria involves its own...
TRANSCRIPT
T C D M . S C . ( E P S ) – R O N A N L Y O N S –
E C 8 0 1 5 C O M P E T I T I O N & R E G U L A T I O N
WEEK 12: COMPETITION & REGULATION: REVIEW
STRUCTURE
Review Sessions
1. Recap of Module
2. Exam Questions
2
RECAP MT1: REASONS TO REGULATE
• Ultimate goals of efficiency and equity
• Proximate goals/instruments of: employment, price stability,
competitiveness, living standards, social justice
• Understanding regulation involves mixing 'standard
micro'/deductive with 'behavioural nuance'/inductive
• Distortions (and market failure) as the basis for government
intervention
• Externalities, public goods, monopoly power (exog, endog),
risk/uncertainty, imperfect information
• In PPF (efficiency) terms, regulation should be either shifting
out PPF or getting us on to the frontier
3
RECAP MT1: METHODS OF REGULATION
• Externalities: regulate, tax/subsidy, moral suasion, allocate property rights
• Public goods: direct provision, private (under public
regulation), mixed
• Exogenous monopoly power (IRTS): regulation, public
ownership, trade policy/FDI
• Endogenous monopoly power (behaviour): regulation,
competition policy, trade policy
• What about monopoly power due to government regulation?
• Risk/uncertainty (moral hazard, adverse selection, principal-
agent problem): regulate, public provision (risk pooling),
public information
• Imperfect information: regulation, provision of information
4
RECAP MT2: WHAT, WHY & HOW
• What is regulation?
• Economic/direct (e.g. about price/investment/entry/ownership;
often sector-specific) vs. social (health, safety, env, fairness; broad
not specific)
• Why to (not) regulate? (Market failure vs. regulatory capture)
• Market failure as necessary but not sufficient condition for
regulation: what are costs of intervention (as well as benefits)?
• Public choice theory: regulation a good similar to others; who
supplies/demands it?
• "Taxation by regulation" - where politicians maximise likelihood of
re-election, regulation will favour concentrated winners over
diverse losers... note also length of regulatory protection
• E.g. of pharma 1996-2001: rent-creating restrictions on new
pharmas
5
RECAP MT2: WHAT, WHY & HOW
• Three core questions: • Why regulate?
• Which instrument?
• What are the consequences?
• Should be viewed through both market failure
(benefits of reg) and public choice (potential
costs/consequences) lenses
• How to regulate?
• Minister vs. independent
• Move towards latter: less conflict of interest; greater
regulatory certainty…
• … but accountability vs independence
6
RECAP MT3: WHAT WORKS?
7
Intervention/ Market Failure
Remove
barriers to entry
Price and
quality regulation
Mandatory
insurance or USO
Mandatory Standards
Publication
or labelling rules
Market Power
Externalities
Imperfect Information
RECAP MT3: RIA
• Regulatory Impact Assessment • What is the policy problem? What is the market failure?
• What alternatives are there to regulation?
• What are regulations main costs/benefits [policy costs, compliance costs, admin costs, competition effects, distributional effects]
• What might be unintended effects?
• RIA involves its own cost/benefit analysis • Note: lack of ex-post review in Ireland
• Formal RIA steps:
1. Describe context, objective, options
2. Identify costs, benefits, other impacts
3. Apply significance filter
4. Further analysis if required
5. Consultation
6. Enforcement and compliance issues
7. Review
8
RECAP MT4: WHAT IS A MARKET?
• Spectrum from PC to Monopoly
• Where is price relative to MC?
• Signs of market power:
• Define the market: what happens if p increases? Demand substitution? Supply substitution?
• How concentrated? HHI/Gini/Concentration ratio
• Barriers? Natural, strategic, exogenous, endogenous; is
there a minimum viable/efficient scale?
• Competitive environment? Coordinated price effects?
• Efficiencies from a merger? If this is the argument, the
burden of proof is on the merging parties
9
RECAP MT5: HORIZONTAL & VERTICAL
• Competition policy: typically sets diffuse potential
beneficiaries against concentrated potential losers
• E.g. taxi licences
• Is market contestable?
• If so, why intervene (other than to potentially further reduce
barriers)?
• Horizontal (substitutes) vs. vertical (complements) –
up/downstream • Positive welfare effect of merger where both up- and downstream
are monopolist
• Much more ambiguous in case of restraints on pricing/distribution
(without merger) – e.g. vertical price fixing, exclusive
distribution/purchasing, price discrimination
10
RECAP MT7/8: BANKING/SECTORAL
• Banking regulation:
• Why? Rationale in systemic risk, info asymmetry (and fraud)
• How? Deposit insurance (who pays?), micro-prudential
(governance, risk management), and macro-prudential (stability
of entire system)
• 2003-2008 system: separate Central Bank and Financial Regulator –
principles-based, rather than rule-based (lack of macro-
prudential)
• MT8: Overview of sectoral regulation
• Economics of price regulation: avoid price being too high or too
low
• Selected sectoral issues
11
RECAP MT7/8: PUBLIC OWNERSHIP
• Public ownership:
• Why sell state assets? Budget stability – pay down debts? Or
to pay for (transitional?) current spending?
• What are they? Tangible (semi-states) vs intangible (mineral right, trademarks, radio spectrum) – typically non-traded,
often infrastructural
• What has policy been? Privatisation programme since 1991
– raising €6.3bn net 1991-2006 (Eircom biggest chunk); 2011-2015 has yielded ~€2.5bn (gross)
• What are policy options? Maximise revenue; hold minority
share; or recall market failure – what is rationale? Still
relevant?
12
STRUCTURE
Review Sessions
1. Recap of Module
2. Exam Questions
13
SECTION A: Q1
• “Ireland’s system of economic or direct regulation
of household waste collection lacks a clear
rationale, needlessly raises collection costs and
creates negative externalities. A better alternative
exists.” Discuss.
14
SECTION A: Q2
• In the upcoming General Election a new party, the
“Centre Party”, in its draft Manifesto, Promoting
Growth and Efficiency, currently states under Public
Ownership: “Public ownership good, private
ownership bad.” You have been asked, based on
the available evidence and drawing on your
economics expertise, to develop a more nuanced
Manifesto wording on the issue of public ownership
(50 words max) and provide a set of
accompanying speaking notes (roughly 1200-1400
words) justifying the position.
15
SECTION B: Q3
• The evolution of markets over time reflects external
changes (such as technology or regulation) and
internal changes (behaviours of participants in the
market). Consider any two of the markets that
formed part of the Presentation Exercise in
November. Contrast the evolution of competition in
both markets, focusing on the drivers of change
and the potential or actual role of policy in the
process.
16
SECTION B: Q4
• Explain how market structures in upstream and
downstream markets need to be taken into
account in how policymakers should act to
promote competition. In your answer, use US,
European or Irish examples and consider both the
long and short term consequences of changing
market structures.
17
SECTION C: Q5
• Set out a brief regulatory impact analysis for ONE of
the following hypothetical measures, outlining each
step that would be required to complete the
analysis including identification of possible
alternatives:
• A rule that all lenders must pass through changes in base
rates fully and promptly to retail variable rate mortgage
customers from the date of enactment onwards. This would be in response to public outcry about margins on non-
tracker loans.
• A restriction on retail pricing of alcoholic beverages,
imposing a minimum price per unit alcohol content. This
would be motivated by health and other social policy
concerns about excessive alcohol consumption. 18
SECTION C: Q6
• Price regulation can improve or harm societal
welfare. Discuss the circumstances when it may be
beneficial or harmful, making reference to real-
world examples. How can the choice of price
regulation method affect the risks associated with
such regulatory measures?
19
SECTION D: Q7
• Dun Laoghaire Rathdown County Council recently
introduced a requirement that new homes must be
built to low-energy passive house standards. Assess
the likely impact of this regulation on (a) the Dublin
housing market, (b) social equality, and (c)
environmental outcomes. What information would
you require to decide for or against such a
proposal?
20
SECTION D: Q8
• An international financial services transaction tax
has been proposed by some. Discuss its rationale
and its likely benefits and costs, using the EU map of
regulatory impacts. Based on your understanding of
Ireland’s trading sector, what impact might this
have on Ireland’s international competitiveness?
21