Policy Remedies

1
Policy Remedies
Session 5
MT292 Introduction to Technology
Policy Vanderbilt University School of
Engineering
2
Remedies to Market Imperfections

• Market-based Solutions
• Government Intervention

3
Market-Based Solutions

• Voluntary Industry Cooperation
• Nongovernmental Standards Bodies
• e.g., IEEE, UL, ACM, URAC
• - Key risk industry captures regulatory body
• e.g., accounting profession and FASB
• Technology Clusters
• E.g., Research Parks
• Privatization of Public Services
• Outsourcing, Performance Contracting, Vouchers
• "Securitization" of Risk, Externalities
• Derivatives
• Asset-based Securities (e.g., secondary mortgage
  market)
• Pollution Rights
• Fishing Rights

Acronyms spelled out in slide notes below.
4
Government Intervention (in ascending order of
intervention level)

• Reduce market inefficiencies
• Incentives/Disincentives
• Direct and indirect subsidies
• Regulation
• Direct Investment

5
Reduce Market Inefficiencies

• Reduce entry barriers
• e.g., FDA accelerated approval processes
• Standardization
• Disclosure requirements
• e.g., Sources of financial support for
  researchers
• e.g., Labeling regulations
• Reduce mobility barriers
• e.g., Euro, NAFTA, WTO
• Reduce transaction costs
• Internet
• Trade barriers

6
Incentives/Disincentives

• Incentives
• e.g., RD tax credit
• e.g., Internet Tax Moratorium
• Disincentives
• Taxes
• Penalties for Polluters
• User fees

7
Direct and Indirect Subsidies

• Direct Subsidies
• Cooperative Research
• See National Research Council
• e.g., Government-sponsored AIDS research
• e.g., NIHs genome project
• Support of Infrastructure
• Federal programs to support public education
• Sponsored basic research
• Communications
• Universal Internet Access for Schools
• Transportation
• FAA

8
Direct Regulation

• Control Supply/Demand
• Price Controls
• Drugs/Medical Care
• Rationing of Supply
• Energy, Scarce Resources
• Emission Controls ( CAFE standards)
• Immigration Policy
• Spectrum allocation
• Body organs/health care

9
Direct Regulation

• Control Product/Process Characteristics
• FDA, Consumer Product Safety Com., EPA, etc.
• Control Profits
• Rate-of-Return Regulation
• Utilities, Insurers
• Control Entry
• Licenses, patents, permits, charters, franchises,
  concessions

10
Direct Regulation

• Control Collusion/Increase Competition
• Antitrust
• Conduct remedies
• Structural remedies
• For vertical concentration (Microsoft)
• For horizontal concentration (Ma Bell -gtRBOCs,
  media)
• Control Ownership
• Caps on controlling interest
• e.g., foreign control of telecommunications,
  defense firms

11
Direct Investment(public sector ownership)

• Technology Transfer/Civilian Spinoffs
• Nuclear Power
• Navy -gtAEC -gt utilities
• Commercial Aerospace
• NASA -gt private launch, transport companies
• Internet
• DARPA -gt Network Solutions -gt private sector
• State-owned enterprises
• common outside U.S.
• e.g., energy, telecommunications, transportation
  sectors

Acronyms spelled out in slide notes below.
12
How do you determine the best policy intervention?

• evaluation criteria (the four es)
• Effectiveness
• Equity
• Enforceability
• Economic efficiency

13
Effectiveness

• Does the remedy address the policy problem?
• Does it lead to a satisfactory solution?
• Can you determine (measure) the policys impact?
• Example Microsoft antitrust settlement

14
Equity

• Does the policy remedy address the needs and
  concerns of all the affected parties?
• Do all parties have a role in the formulation of
  the policy?
• Are the interests of the less powerful
  constituents adequately addressed?
• One of the reasons for public intervention in the
  first place!
• Example Use of genetic screening for employment,
  insurability decisions

15
Enforceability

• Can the policy be implemented at reasonable cost
  and effort by all parties concerned?
  (feasibility)
• Can implementation be monitored?
• Can compliance by all parties be enforced?
• Example pollution from agricultural run-off

16
Economic Efficiency

• To what extent does the policy option introduce
  unintended distortions (side effects) into the
  economic environment?
• Rule of thumb the greater the level of
  intervention, the more unintended side effects it
  will introduce.
• Are these effects acceptable?
• Does the policy provide for minimizing them?
• Example CA electricity price controls

17
Common Economic Distortions of Policy
Interventions

• Moral Hazard - The policy inadvertently
  encourages counterproductive behavior
• Ex. 1 highly subsidized health insurance reduces
  the personal cost of unhealthy behavior
• Ex. 2 subsidized interest loans, loan guarantees
  encourage reckless risk-taking (FDIC)
• Adverse Selection The benefits go
  disproportionately to those who least need them
• Ex. MSAs draw the healthiest subscribers from
  the insurance pool, leaving the least healthy and
  raising premiums.
• Agency Problems Payer and consumer are different
  parties
• Ex. Workers Compensation discourages job-seeking.

18
Measuring Economic Distortion of a Tax or Subsidy
The Harberger Triangle
Shaded area is cost to the economy (welfare loss)
19
Guidance for Policy Developers

• Always begin the policy debate by asking, What
  if we do nothing?
• Democracies and free-market economies, like the
  body, have many self-correcting mechanisms.
• The more intrusive the policy into the economy,
  the higher the burden of proof on the policy
  maker
• Select the policy intervention that accomplishes
  its purpose with the lowest level of economic
  distortion