Whether Regulations Are Necessary - Essay Example

Regulation In the past, there have been crises and developments in the global and national economies, leading to regulation occupying a central role. Many governments have legislations that restrict certain trades or set certain limits for such trades, with critiques of questioning the absolute solution of self-regulation or regulation in not just financial crisis context, but also in complex problems. Different governments regulate for different reasons. It is due to this difference that the regulations vary from one government to the other. However, there is a distinction between technical justification and motives for regulation. National governments may regulate for a variety of reasons, including re-election and influence from economically powerful houses (Baldwin, Cave, and Lodge, 2012:16). Governments may also technically justify regulations, thus the general assumption that the regulation was in the context of public interest. However, most rationales presented are instances of market failure, thus regulation is initiated, as the uncontrollable market will produce results or behaviors against public interest. Other scenarios may present issues of market absence, or an ineffective market. One of the advancing and developing industries in the global economy is information and communication technology (ICT). The rapid growth of ICT presents concern over regulation and the possibilities of eliminating market failures, thus the rise of such regulatory bodies like the Federal Communication Commission in the US. In summary, regulation is better than competition in safeguarding public interest. Among the theory favoring regulation, include public interest theory, private interest theory, and interest groups theory. According to the public interest theory as argued by Baldwin, Cave, and Lodge, in their 2012 publication, the rationale behind regulation is to benefit and protect the public at large. The theory capitalizes on potential market failures such as monopolistic powers, externalities, asymmetric information, and strategic behaviors. It thus creates the ideology that consumers need protection from market failures and business abuses, with the assumption that regulation serves the best interests of the public through restricting potentially harmful business behaviors (Baldwin, Cave, and Lodge, 2012:164). The interest groups theory suggests that there is need for regulation for the interests of stakeholders, while the private interest theory seeks to safeguard the interest of private interest groups in regulation. Generally, these theories suggest regulation occurs because the government seeks to overcome information asymmetries as well as align government interests with operator interests, protect customer desires from market power in ineffective competitive markets, protect desires of operators from rivals, and protect operators from government opportunism. Market failure rationale cite different issues that need to be addressed, such as monopolies and natural monopolies, windfall profits, externalities, public goods, and information asymmetry. According to business analysts, these issues have been a stumbling block in market entry. It is arguable that some government regulations are the core course of the regulations. For instance, a monopoly refers to the concept where only a single seller produces for the entire market or industry. Monopoly output and pricing result from occupation of a single seller in the entire market, unique products with no sufficiently close substitutes for consumer, and substantial barriers that restrict the entry of other sellers into the market and difficulty in exiting. It might be possible that the government has licensed this single seller or there are requirements to enter in the market like large capital, which can only be financed by the government. Existence of monopolies result to market failures as competition becomes deficient. About public interests, monopolistic firms may restrict output and raise prices above the marginal cost in efforts of maximizing profits (Brownsword, 2008:113). Monopolies do this as additional sales may be realized only by lowering the pricing of the output. However, monopolies tend to forgo sale such that revenue loss from fewer sales will be automatically be compensated with increased prices of those few units sold. The fact that monopolies set their prices without dictation of market mechanisms increases the possibility of high prices aiming at high prices. This results to customer mistreatment. Compared to perfect competition, monopolies affect the market or industry through higher prices, reduced output, and the unfavorable income transfer from consumers to producers. Critiques of regulation argue that competition or antitrust laws may be a solution to create conducive business environment for competition. However, in markets where natural monopolies exist, the competition laws may be undesirable. A natural monopoly exists when only one firm can serve the market at the least cost because the available economies of scale as so large. Essentially, this means that it will cost the society less for production by a single firm than many firms will. Thus in ICT, it would be desirable to give monopoly one company to lay networks of fiber optic cables subject to issues such as access and price, rather than have different companies lay multiple networks (Mansell et al, 2007:321). To determine the existence of a natural monopoly in an industry, there is need to compare the extent of the available economies of scale to the demand of the products. A natural monopoly, like any other monopoly, presents problems of higher prices, reduced output, and transfer of revenue to producers from consumers. However, the option of introducing competition laws may be undesirable as they may be socially costly, thus advocating for regulation of output, prices, and quality. The regulatory body will seek to set the prices of the products near incremental cost to encourage the producer to expand output levels similar to those induced by competitive conditions. Presence of significantly cheaper supply than that available in the marketplace may enable a firm to earn windfall profits. A company may earn windmill profits if it posses assets that suddenly escalate value, or if locates rich and easily extracted minerals, or identifying some material efficiency in the production process. (Baldwin, Cave, and Lodge, 2012:253) In such instances, regulation may be desirable either to allow the public and the customers to benefit from such profits or transfer of profits to taxpayers. However, if the windfall is a result of efforts, there may be some degree of leniency. In such instances, competitive forces are inapplicable, as they would not produce the desired effects. Externalities, both positive and negative, also justify regulation. Negative externalities refer to the consumption or production of a product that result to harm on other, such as blocked view, pollution, or loud noise. Positive externalities benefit others. The economic problem in this scenario is that the market may fail to capture the costs or benefits of a certain action, like the relay of electromagnetic waves in ICT that may affect the public, leading to inefficient allocation of resources. Assuming that the market captures all production costs (social and private), then the cost for both productions will be lower with higher quantities as compared to the private production alone. Therefore, lack of incentives for internalizing external costs will follow the private production curve, leading to inefficient equilibrium having lower prices and higher quantities than desirable. There are two viable options. First, using Pigouvian tax concept to explicitly price the externalities, or secondly, apply the Cap and Trade concept to cap externality quantities, enabling the market to establish ideal prices (Robinson, 2003:126). Nonetheless, the private producer faces production social cost and the market establishes efficient resources allocation. The solution to negative externalities is regulation through taxes, while positive externalities are subsidized. Competitive forces may further institute higher quantities and lower prices than social optimum. This follows the Coase theory that states that if parties affected by externalities negotiate among themselves with clear property rights, then they will reach an efficient outcome, regardless of the property rights’ holder. Regulation of ICT by governments extends into vast areas, including pricing regulation, privacy, copyright, and market entry and merger contents, among others. The nature of the ICT provides a challenge to government establish regulatory bodies, especially in developing countries that do not have the capacity to design large costing models. Although developing countries face the most significant problems, these challenges, and opportunities are universal to all regulators (Newbury, 1999:216). Wireless demand in most countries exceeds the fixed demand, promoting affordable telephony services. Secondly, the wireless market provides a larger scope for competition, thus limited requirement of regulation. Lastly, customer may lack or have limited access to wireless broadband services, especially in rural areas, as fiber-based access networks are not well rolled-out. Most countries have traditional fixed technologies that may enable them to design appropriate interconnection policies to VoIP, wireless networks, and other technologies. For instance, the per-minute concept is a traditional fixed technology product, though they may be irrelevant in VoIP networks. The main concern in ICT regulation is policies. Many countries combined regulation, policy, and operation of telephony providers into a single government department. However, privatization and liberalization of the market means that these function require allocation to different organizations. For instance, EU adopts a three criteria test, all that determines the ex-ante regulation requirement (Armstrong, 2000:65). These tests determine whether competition may produce the desired outcomes in place of regulation. In most countries, majority of the policy goals favor regulation over competition. For instance, a universal affordable access is the policy goal of all regulators, regardless of development levels. Traditionally, this was supported by access to usage cross-subsidies. However, this method is inconsistent with competition, though social policies such as geographical tariffs still exist and pose a challenge to regulators in their efforts to implement efficient cost-based tariffs. Secondly, governments capitalized on platform-based competition or facilities-based competition, particularly present in vertically integrated market stakeholders like cable or mobile operator and telecommunication incumbents. Some governments consider fiber broadband networks as natural monopolies, but the policy focus results to a shift from infrastructure-based competition to service-based competition. This is particularly common in developing countries, leading to natural monopolies hence infrastructure-sharing, interconnection, and unbundling policies. Third, competition does increase efficiency (Napoli, 2001:138). However, presence of competition for call revenue makes it impossible to realize cross-subsidies from these call revenues that were the source of universal access even with monopolies. Therefore, local call prices and line rentals must rise in order for the long-distance call prices to approach the cost. How fast these should occur depends on the policy, commonly through price caps (Cap and Trade System) reflected in retail and access price regulation. Developed countries eliminate cross-subsidies by reducing mobile termination rates. Fourth, most countries emphasize on the widespread adoption of broadband as priority objective. The mobile broadband is obviously the principle delivery platform inmost countries, thus the need for policies to regulate the allocation of wireless spectrum (Mansell and Steinmueller, 2000:244). Moreover, optical fiber networks are relatively expensive thus the need for public investment where the private sector lags behind in the market. Fifth, the rapid innovation and advancement in ICT can be managed only through regulation to ensure a healthy ICT sector. In a market controlled by competition, such advancements and developments may bring new products, applications, and services into the sector, possibly undermining the existing service revenues. Prime examples include Smartphone applications and VoIP. Lastly, there must be predictable, consistent, and clear policies and regulations in order to attract private investors in the ICT sector. Competition does maximize society benefits through increasing production, allocation, and dynamic efficiency. However, competition cannot replace regulation as some market situations render competitive force weak and insignificant. Bibliography Armstrong, K. A., 2000, Regulation, Deregulation, Re-regulation, European Dossier Series. Philadelphia: Kogan Page. Baldwin, R., Cave, M., and Lodge, M., 2012. Understanding Regulation: Theory, Strategy, and Practice. New York: Oxford University Press. Brownsword, R., 2008, Rights, Regulation, and the Technological Revolution. New York: Oxford University Press. Mansell, R. and Steinmueller, E., 2000, Mobilising the Information Society: strategies for growth and opportunity. New York: Oxford University Press. Mansell, R. et al (eds), 2007, The Oxford Handbook of Information and Communication Technologies. New York: Oxford University Press. Napoli, P.M., 2001, Foundations of Communications Policy: principles and process in the regulation of new electronic media. New York: Hampton Press. Newbery, D.M., 1999, Privatization, Restructuring and Regulation of Network Utilities. Massachusetts: MIT Press. Robinson, C., 2003, Competition and Regulation in Utility Markets. Cheltenham: Edward Elgar Publishing. Read More