Regulation, as noted in guidance material issued by COAG, refers to:
the broad range of legally enforceable instruments which impose mandatory requirements upon business and the community, as well as to those government voluntary codes and advisory instruments for which there is a reasonable expectation of widespread compliance.88
Historically, services in the infrastructure sector have been subject to economic regulation due to their public good89 characteristics and natural monopoly90 market structure. Services in this category include some parts of the transport and utilities sectors (for example, electricity and water). The economic regulation of those services seeks to ensure an adequate supply of - or access to - services, and fair and efficient pricing of those services.
As a broad observation, governments are aiming to minimise the extent of regulation, consistent with the need to achieve broader public policy objectives.
COAG has issued a guide on best practice regulation to be applied to the operation of ministerial councils and national standard-setting bodies. The Australian Government has also published a guide to regulation to be used by members of the Australian Public Service involved in policy making.91 Internationally, there is also agreement on what constitutes sound regulatory practice. In 2012, the Organisation for Economic Cooperation and Development (OECD) adopted a set of international guidelines and principles to be implemented by member countries on regulatory quality and performance.92
There is significant commonality across these documents concerning the circumstances in which regulation is worthy of consideration and the principles underpinning best practice regulation.
Best practice sees economic regulation where there may be some form of 'market failure', such as where there:
■ is an inefficient allocation of resources;
■ may be broader equity issues, e.g. levels of service to be delivered in rural or remote areas;
■ is a natural monopoly or abuse of market power;
■ is a need to correct for 'information asymmetry' between parties involved in a transaction;
■ are externalities (positive or negative); and
■ is a market place that is unable to deliver a much needed public good, particularly in relation to non-rivalrous goods and services and non-excludable public goods.93
At a high level, the principles underpinning best practice regulatory impact assessment processes:
■ require a clear articulation and understanding of the problem that is being attempted to be solved through regulation, e.g. the magnitude of the problem and the case for action;
■ assess options (including the option of not regulating) against a variety of considerations such as compliance costs, competition effects, distributional implications, risks and implementation arrangements;
■ assess the net benefit of each option, including the application of cost benefit analysis;
■ provide for stakeholder/public involvement in the process of assessing and making regulations;
■ promote transparency, e.g. publication of the information on which decisions to make regulations are taken; and
■ provide for periodic review of regulatory arrangements.
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88. Council of Australian Governments (2007), p. 3
89. In economics, a public good is defined by two characteristics, the fact it is both non-excludable and non rivalrous meaning that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others.
90. In economics, a natural monopoly refers to an industry in which the most efficient method (involving the lowest long-run average cost) for production is to be permanently concentrated in a single firm rather than contested competitively. Typically, this occurs in industries that have high initial sunk costs.
91. Department of the Prime Minister and Cabinet (2014a)
92. Organisation for Economic Cooperation and Development (2012)
93. The lists of circumstances and principles above are adapted from Department of the Prime Minister and Cabinet (2014a), pp. 22-24 and Council of Australian Governments (2007), p. 10.