Preservation of established "property rights” Once established, regulation tends to spawn and then protect certain groups, which subsequently have a vested interest in its continuation. Thus, avoiding allegedly adverse economic consequences to those interests sometimes becomes a powerful argument for continuation of regulatory controls. As a result of regulation, firms or individuals may have acquired "property rights," such as trucking certificates and broadcast licenses. Such property rights associated with regulation are often very valuable. If regulation were eliminated or relaxed some would sustain capital losses, and others might be burdened with high finance charges for assets with lowered value. For example, negotiated brokerage rates required by the SEC drastically lowered the value of seats on the New York Stock Exchange. Regulation is not always necessary to provide continued protection of secure positions or to guard against losses. In some cases deregulation may benefit the industry as a whole. In other cases, individual regulated firms will gain. Maintaining regulation simply to protect existing interests also means that consumers and others will make continuous payments to these groups, the sum of which will often far exceed the gains to the protected group. Should it be determined that some group is deserving of support, it will generally be cheaper to provide for this through direct subsidy than by continued regulation. More important, such subsidies will be visible in the sense of being subject to the budgetary process. Yet there may be a responsibility to those who have invested on the basis of expectations as to regulation. The issue is similar to protecting consumers by controlling prices. Temporary aid or protections may be proper, but permanent shielding is likely to impose increasing costs and distortions. In short, preservation of property rights is not a sound basis for continued regulation. Where legitimate expectations as to regulation exist the problem is one of fashioning an appropriate means of transition from the regulatory scheme. Deregulation. C. REGULATORY ALTERNATIVES Although much of Federal regulation is justified, alternatives to particular methods of regulation may be appropriately adopted in certain areas. A major alternative to regulation is no Federal intervention or, in the case of existing controls, deregulation. In that regard, it should be recognized that there are two major forms of Federal regulation. First, there is economic regulation which is concerned with prices, entry, and rates of return. The major purpose of economic regulation is to insure the smooth functioning of the economy through controls on monopoly, discrimination, unfair business practices, and denials of service. The activities of the Civil Aeronautics Board and the Interstate Commerce Commission are examples of that kind of regulation. A second form of Federal regulation has as its primary concerns a broad range of social objectives, such as health, safety and environmental protection. Examples of agencies involved in that second category include the Environmental Protection Agency, Occupational Safety and Health Administration, and the Consumer Product Safety Commission. The distinction is significant for questions of deregulation-the elimination of controls. Economic regulation has been often imposed in order to shield a particular industry from the effects of competition and an unfettered market. In that area, elimination of controls allows competitive pressures to operate, sometimes without serious adverse economic effects. However, the lifting of controls in the health, safety and environmental fields typically would not result in similar benefits. For example, the environment has historically been used by the private and public sectors as if it were a free resource, when in fact it is both scarce and exhaustible. Absent some form of regulation, there would be no economic incentive to absorb the costs of abatement and conservation, since the costs of pollution usually fall elsewhere than on the polluter. Thus, a "free" market in environmental resources would not insure clear air and clean water. To the contrary, business and government would as they have in the past use the resource without sufficient concern for the public interest. On the other hand, it may be possible in certain areas of economic regulation to allow free market operation without adverse effects on the national economy. Recent Federal action to deregulate the airline industry illustrates that proposition. Civil Aeronautics Board regulation of airlines often meant restrained or lessened competition. For example, between 1950 and 1974, the CAB received 79 new airline carrier applications. None of those applications were approved. Federal regulation shielded the existing airline industry from competition, with the result that airline fares were much higher than necessary. Certainly the consumer did not benefit from CAB regulation. High consumer costs are indicated by the fact that in the intrastate market in California, where no Federal controls exist, carriers were able to provide high quality service at fares as much as 50 percent lower than Federal certified carriers in similar interstate routes. In early 1977, the General Accounting Office estimated that airline deregulation would save between $1.4 to $1.8 billion annually. We now know that relaxation of Federal controls on airlines has positively benefited both the industry and the consumer. Today the Nation's airline business is in much better financial condition than prior to that action. The pro-competition approach has produced lower fares and varied service, which in turn has attracted more passengers and generated more jobs for the industry. Published reports indicate that every carrier has experienced increased operating revenues, ranging from 10 percent to 30 percent higher for the first 6 months of 1978 as compared to the same period in 1977. Operating profits have similarly increased. Under the "Airline Deregulation Act of 1978," which was recently signed into law by the President, the CAB's powers must in the future be used to foster and encourage, rather than restrict, competition between air carriers. The agency's powers are scheduled to lapse in 1983, and the CAB itself will go out of existence by 1985. The deregulation approach taken with airlines should be considered for other economic areas. Federal controls on trucking may be such an example. Like airlines, the cost of trucking regulation is very high. It is estimated that those regulatory controls cost the U.S. economy between $1.4 and $2.9 billion annually. Since ICC controls restrict competition by limiting entry into the field, regulation supports the commercial value of ICC operating certificates, many of which date to the 1930's when controls were first established. Today those certificates are valuable licenses. This regulation, however, does not benefit the consumer, who pays higher rates for interstate trucking than would otherwise exist in the absence of controls. It does not appear that continued Federal regulation of trucking is justified, both in light of present day conditions and in the context of the adverse effects those controls appear to be having on the economy. Performance vs. specification standards Where a decision has been made to regulate in order to insure that firms take full account of the consequences of their actions, a variety of regulatory approaches is available. A standards-enforcement approach may be the best choice if there are major information problems, or if potential risks are grave and consequences severe or irreversible; in other words, where either certainty of result or some definite threshold level of achievement is considered essential. Even under that approach, though, it is critically important to appreciate the relative merits of specification and performance standards. "Performance standards" require that certain goals be achieved, such as emission levels or nutritional qualities, without specifying how they are to be achieved. That kind of standard allows firms and individuals to achieve the least-costly method of compliance. For example, a smelting business could decide to install scrubbers in its smokestacks so that it could adhere to the air pollution standards, or it may find another technological device which would allow it to meet the standard. The "performance standards" approach encourages flexibility and technical change, although extensive monitoring may be necessary to insure compliance. On the other hand, "specification standards" require particular means of achievement, such as specific design, equipment, or techniques. Unlike performance standards, monitoring and enforcement may be less burdensome. Yet delineating specific means of achievement necessarily limits the range of technological change and may impose unnecessary costs. Flexibility is also lost, as firms and individuals are given little latitude to choose the least costly method of compliance. Nevertheless, truly severe risks may suggest the need to actually specify by standards particular technologies, processes, or products. For example, in the nuclear regulatory area, it is not possible to simply require a performance standard-such as that reactors be "safe" in the same way the National Highway Traffic Safety Administration might require certain maximum automobile braking distances under specified conditions. In such a complex area as nuclear safety, the standards must frequently relate to the specifications of the production process: that certain kinds of pumps and grades of steel be used, and so forth. Standard setting vs. information disclosure Still another alternative to the standard-setting approach is the increased use of information regulation. For example. rather than banning outright a product which does not meet a particular standard. it may make sense to allow distribution of the product provided that it is accompanied by information disclosing the hazards or problems associated with its use. This approach is now taken with numerous products, notably cigarettes, thereby allowing consumers who are willing to take certain risks the opportunity to purchase the product. In addition to allowing a greater range of choice, information regulation allows consumers to be aware of the presence of risks which could be avoided by proper knowledge. Information thus has some of the automatic quality of incentives; in other words, it can naturally prompt a certain response. However, like incentives, the existence of a potentially severe risk or irreversible consequences suggests that information without something more is inadequate. Moreover, if the information is too complex to be understood by most or all of its intended recipients, information regulation alone may not be adequate. Also, if the recipient of the information is different than the ultimate users of a product, information regulation alone may not be enough. Under these circumstances information might be properly supplemented with vigorously enforced standards and suitably designed incentives. Economic incentives as alternatives to traditional regulation Economic incentives may be an alternative or a valuable complement to the use of standards. As the risk of severity declines, and the certainty of result is less essential, the desirability of an incentive approach increases. Reduced costs of enforcement and compliance may enhance the desirability of an incentive approach. Thus, fees, delayed compliance penalties, tax concessions, exchangeable rights, and other systems can be effectively utilized. Taxes or other fees can be based on some measure of performance, such as the extent of pollution produced or degree of health hazard. In many environmental areas, incentive systems can reduce compliance expense by automatically concentrating abatement efforts on those firms with the lowest compliance costs. Such systems can induce firms and individuals to abate their activities up to the point where costs, including any fee, or further action would not be justified by extra fee savings thereby obtained. Thus the fee itself will be treated by a firm just like other costs of operation, such as electricity, labor, and materials. The firms will weigh the fee (which, in effect, is the cost of nonabatement) against the cost of abating the hazard and thus avoiding the fee. Fee systems have several advantages. One of the main advantages of such financial incentives is that they do not discriminate among alternative methods of compliance. Rather, firms and individuals have built-in economic incentives to take the least costly action indicated by the incentive. Perhaps most important, when fees are imposed it becomes profitable to reduce the hazard. There will also be clear incentives to innovate and pursue the least costly methods of achieving a particular goal. That will involve consideration of various possibilities, without favoring any particular approach. The result will be that those subject to fees will be induced to make this contribution to reducing the hazard at a minimum cost. All of which is automatic and not unnecessarily dependent on administrative discretion and review. As mentioned previously, in some cases of high risk, only specification of certain technologies may provide sufficient protection. For example, the risks from mercury discharges are so high that economic incentives may not provide enough certainty to insure a safe level of discharge. Or it may be considered too risky to allow continuation of a particular activity, even though participants are willing to pay high costs and the resulting revenues are used to compensate the losses. The direct subsidy option Direct government subsidies are an important alternative to traditional regulation. Such subsidies may be in some cases less intrusive and possibly more effective in achieving regulatory objectives that rate and entry controls. For example, direct subsidies could be used to provide service to certain groups or communities, or to develop industries considered vital to a national interest. While direct subsidies do impose costs, that expense is visible and subject to congressional and public review in the budget process. Moreover, unlike regulation-which can stifle innovation, restrict competition, and encourage indirect or “invisible" subsidies-direct payments need not require an elaborate bureaucratic structure. Costs could be minimized through competitive bidding, and by awarding the subsidies to those who can perform at the least cost. Moreover, in order to moderate demand, those benefiting may under certain circumstances be required to pay part of the costs. Of course, this listing of alternatives is partial, and not intended to be exhaustive of the range of options available to government. Also in any given area, there may be numerous possible alternatives for Federal action. For example, at least five different regulatory approaches, or combinations thereof, could be used to address the problems of health hazards in cigarette smoking. Tobacco consumption could be banned altogether (prohibition). Or, government could specify production standards, such as the tobacco content in cigarettes, or the kind of paper to be used (specification standards). Or, standards could be established to insure that cigarettes do not exceed certain tar and nicotine levels (performance standards). Or, government could require health hazard warnings to be displayed on cigarette packages and advertising (information disclosure). Or, taxes or fees could be imposed for the purpose of discouraging cigarette smoking (economic incentives). Several of these options could be used in a combined effort to reduce this hazard. For example, maximum tar and nicotine levels could be set, while continuing the health warning on packages. The choice of a particular option or group of options might depend on such factors as the magnitude of the hazard: its impact on the public at large; the degree of public awareness of the hazard; the elasticity of consumer demand; and the opportunities for technological development or change in the industry. D. USE OF IMPACT ANALYSIS IN REGULATORY DECISIONS Impact analysis, which evaluates the costs, benefits and alternatives of proposed government actions, should play an important role in regulatory decisionmaking. It is logical and reasonable to estimate costs, project benefits and consider alternatives before making significant regulatory decisions. In that sense, the impact analysis approach is a useful tool in careful planning and priority setting. In addition, such analysis can make a significant contribution to determining whether the conditions which originally justified government intervention continue to exist. Economic evaluations can help provide some public accounting for the |