20 Feb 2018

Optimal regulation

Back in Nov 2016 (!), I was giving a lecture on institutions and regulation, and I wanted students to understand how (sometimes) markets or other negotiations are more efficient in resolving disputes over damages (from pollution or offense) between the offending and offended parties.

I made the following diagram:

...which looks much clearer here:

Hw can you use this diagram? First, consider the axes: damages and transaction costs, i.e., whether damages are clear (you've lose a leg) or not (you may get cancer) and whether the transactions costs are low (just you and me, kid) or not (the unborn against all SUV drivers).

Now, these axes make it easier to think of regulatory solutions, i.e., prices and markets when damages are clear and transaction costs low (think car accident/insurance); command and control when transaction costs are higher (think car emissions or smoking regulations ); Coasian bargaining when costs are unclear (neighbors agreeing to "think over" the issue of burning rubbish); and, finally, the Good luck! square where damages are unclear and transactions costs high (think climate change).

Bottom line: Choose the "right means" if you want regulation to be as quick and cheap as possible!

1 comment:

David Pannell said...

I published a paper in Land Economics in 2008 which also uses a four-quadrant diagram (a bit different to the above) to reach some conclusions about policy mechanisms choices. You can access it here: http://dpannell.science.uwa.edu.au/ppf.htm
David Pannell

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