Understanding Regulation: Theory, Strategy, and Practice

Citation

Baldwin, R., Cave, M., & Lodge, M. (2012). Understanding Regulation: Theory, Strategy, and Practice (2nd ed.). Oxford University Press.

Chapter Summary

Context and Argument

The book is an introduction to regulation for readers coming from law, economics, business, political science, sociology and social administration, and it deliberately draws on all of them. The second edition was extensively revised to take account of the developments of the previous decade and restructured into seven parts, with several new chapters. It uses examples from different sectors and countries to examine the central questions of regulation, and it reflects on the contentious issues that affect how regulatory institutions are designed and run. Its topics include "better regulation", enforcement, self-regulation, risk regulation, cost-benefit analysis and price-setting in utility regulation. The 27 chapters make up a sequence that moves from why and how regulation is justified, to the tools it uses, to how it is checked and where it is exercised, and finally to the specific problems of network industries.

Chapter 1: Introduction

The opening chapter introduces the subject and the plan of the book, and sets out the changing context in which regulation is now studied.

Part I, Fundamentals: Chapters 2–6

Chapter 2, "Why Regulate?", looks at the justifications for regulation, notably market failure and the protection of the public interest. Chapter 3, "What is 'Good' Regulation?", asks what criteria, such as fairness, transparency and efficiency, a regulatory regime can be judged against. Chapter 4, "Explaining Regulation", surveys the theories that account for why regulation takes the form it does. Chapter 5, "Regulatory Failure", examines how and why regulation fails. Chapter 6, "Regulating Risks", turns to the regulation of risk.

Part II, Strategies: Chapters 7–10

Chapter 7, "Regulatory Strategies", compares the main ways of influencing behaviour. Chapter 8 covers self-regulation, meta-regulation and regulatory networks. Chapter 9 looks at franchising, in particular in public services. Chapter 10 examines emissions trading as a market-based instrument for environmental regulation.

Part III, Rules and Enforcement: Chapters 11–14

Chapter 11, "Enforcing Regulation", sets out the mechanisms and difficulties of enforcement. Chapter 12 presents responsive regulation, in which enforcement adapts to how those regulated behave. Chapter 13 treats risk-based regulation, which allocates effort according to assessed risk. Chapter 14, "Standards and Principles", asks how far regulators should use detailed rules and how far broad standards.

Part IV, Quality and Evaluation: Chapters 15–17

Chapter 15 covers cost-benefit analysis and regulatory impact assessment. Chapter 16 looks at accountability, procedures and fairness in regulatory decision-making. Chapter 17 deals with regulatory competition and coordination.

Part V, Regulation at Different Levels of Government: Chapters 18–21

Chapter 18 considers multi-level regulation across local, national and wider tiers. Chapter 19 turns to regulation and the European Union, and Chapter 20 to regulation and development. Chapter 21 deals with global and international regulation, where issues cross national boundaries.

Part VI, Network Issues: Chapters 22–26

Chapter 22 addresses the regulation of prices in natural monopolies. Chapter 23 looks at using competition in network industries, and Chapter 24 at separation and contestability. Chapter 25 deals with implementing price controls, and Chapter 26 with efficiency and innovation in network industries.

Part VII, Conclusions: Chapter 27

The final chapter draws the threads of the book together.

Key Concepts

Part I: Fundamentals

• Market failure: the standard economic justification for intervention, alongside the protection of the public interest.
• Criteria of "good" regulation: the standards, such as fairness, transparency and efficiency, used to judge regimes.
• Regulatory failure: the ways in which regulation falls short of its aims.
• Risk regulation: the control of risks through regulatory means.

Part II: Strategies

• Self-regulation and meta-regulation: regulation by those regulated, and the oversight of that self-regulation.
• Franchising: the competitive award of rights to provide a service.
• Emissions trading: tradable permits as a market-based form of environmental regulation.

Parts III–IV: Enforcement and Evaluation

• Responsive regulation: enforcement that adjusts its response to the behaviour of the regulated.
• Risk-based regulation: targeting resources at the greatest risks.
• Regulatory impact assessment: appraising the costs and benefits of a regulation.
• Accountability and fairness: the procedural limits on regulators' decisions.

Parts V–VI: Levels of Government and Networks

• Multi-level regulation: the division of regulatory tasks between local, national, European and global bodies.
• Natural monopoly and price control: how prices are regulated where competition is not possible.
• Separation and contestability: introducing competition into network industries.

Critical Analysis

Strengths

• Interdisciplinary by design. The publisher presents the book as an introduction to key debates from the perspectives of law, economics, business, political science, sociology and social administration, which suits a subject that is not owned by one discipline.
• Organisation by function. The seven parts follow a clear logic from justification to strategies, enforcement, evaluation, levels of government and network industries, so a reader can enter at the part that matches the question.
• Cross-sectoral and cross-national examples. The book does not confine itself to one industry or country, and the later parts give specific treatment to the European Union, to development and to international regulation.
• Coverage of both general and sector-specific questions. Parts I–V address regulation in general, while Part VI deals with the price-setting and competition questions of utility-style regulation.

Limitations

• Length and breadth. At over 500 pages and 27 chapters, the book covers a great deal, and chapters are necessarily selective. A reader needing depth on one regime will have to go to specialist literature.
• Not a doctrinal law text. The book is written for a readership drawn from many disciplines and is organised around regulatory questions, not around the rules of one legal system, so law students will need separate texts for the substantive law of competition or of particular sector regulators.
• Dated in places. The second edition reflects the decade up to its publication in 2011–12, so developments since then are not covered.

Where It Fits in the Course

This is the regulation-theory introduction on the site's competition and regulation list. It is best read first. The Oxford Handbook of Regulation, edited by Baldwin, Cave and Lodge as well, is a collection of essays for readers who already know the field and want to follow its research literature; it is the natural next step after this book.

The competition-law books deal with a specific legal field. Whish and Bailey's Competition Law and Jones and Sufrin's EU Competition Law explain the EU and UK rules on anticompetitive agreements, abuse of dominance and mergers, while Hovenkamp's The Antitrust Enterprise does the same for the United States. They are useful alongside Parts II, V and VI of this book, which consider competition as a regulatory tool and the multi-level structure of regulation, but they do not substitute for its general framework.

How to Use This Book

The book is meant for students and practitioners meeting regulation for the first time, whatever their discipline. No legal or economic training is assumed, although a working grasp of basic economic ideas such as monopoly and externalities will help with Part I and Part VI.

A sensible route is to read the Introduction and Part I in order, as these chapters establish the questions asked in the rest of the book. Then choose among Parts II to V according to the course: Parts II and III for the tools and enforcement of regulation, Part IV for evaluation and accountability, and Part V for multi-level and international regulation. Part VI is mainly for those studying utilities and network industries, and the Conclusions chapter makes a useful summary at the end.

Apply each chapter to a concrete sector, for example environmental regulation, financial services or a privatised utility, and ask which strategy from Part II and which enforcement approach from Part III fits it. Use the chapter references to move on to the specialist literature.