The document discusses various approaches to assess the gains from better regulation, emphasizing the importance of principles and evidence in decision-making. It highlights examples such as tariff reform and minimum wages, exploring the benefits and costs associated with reforms. Additionally, it outlines methodologies for cost-benefit analysis, empirical impact assessment, and tools to quantify non-market outcomes.

1. Productivity Commission
Jenny Gordon
Principal Adviser Research
Wednesday 15 June 2016
Assessing the gains from better
regulation

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A hierarchy of approaches
• First principles
• Principles plus evidence
• Partial cost-benefit
• Full cost-benefit
• The Commission mainly does ex ante
assessment

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Principles as a starting point
• Addressing market failures
– Information asymmetry
– Market power
– Externalities
• Improving market function
– Greater competition
– Lower transactions costs
– Removing price wedges

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Principles (cont)
• Low/no cost of change
– Compliance costs – business as usual or lower
– Distortions – removal or reorientate
– Costs only on those who had previously benefited

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Example: tariff reform
• Clear first principle case that tariffs distort relative
prices and impose net costs on the economy
(allocative inefficiency)
• But winning the reform argument required:
– Evidence of failure of infant industry argument
– Demonstration of the effective rate of protection provided
– Demonstration of the costs to exporting industries

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Principles plus evidence
• Principles that have been shown to work before
– Such as demand curves slope down
– Businesses will take opportunities to rent seek if offered
• Evidence threshold
– that principle holds in the situation considered
– that shows it does not hold in the situation

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Developing evidence
• Testing principles in practice on stakeholders
– Issues paper
– Consultations
– Workshops
– Submissions
– Draft report
– More feedback loops to test logic
• Testing principles on available evidence

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Example: minimum wages
• Empirical question is how much they reduce
employment
• Workplace relations undertook econometric analysis
(regression discontinuity) – found small effects on the
probability of finding a job for people who were
unemployed
• But also that the FWC minimum wage decisions took
labour market conditions into account

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Partial cost benefit
• Quantify main economic costs and benefits
• Methods:
– Market prices and quantities distortions
(subsidies, tariffs etc) – first round effects
– Economy-wide effects
• Econometric estimates
• Modelling

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Determine the hurdle
• What do the benefits of change need to be to exceed
the costs imposed by the reform?
• Who benefits and who pays the costs matters
– Is compensation needed to get the reform up?
• Useful where benefits of reform are hard to quantify
– Clarity on the cost of not reforming (should be high)
– Clarity on the costs of a reform (should be low)

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Example: Parallel imports of books
• Costs of comparable products across countries
– Various methods range 9-22% higher than UK, 35 to
50% higher than US
– Market size 2008 $2.5 billion
• Benefits of restrictions
– Higher returns to Australian publishers
• Support for Australian authors – cultural gains

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The full cost benefit framework
Inputs
Ø To achieve reforms
Ø To implement
reforms
Direct outcomes
Ø Direct effects of
changes induced
by regulation
Community-wide
effects
Ø Flow-on
Ø Spillovers
Other external
influences
Overall impacts
Ø Changes in all
outcomes over
time stemming
from regulation
Other related
Ø Actions/pressures
Ø Interaction with
other regulations
Changes in wellbeing
Ø Net benefits
Ø Distribution
Outputs
Ø Changes in
behaviour as a
result of regulation
Community values
Ø Prices for market
impacts
Ø Aggregate of
individual values for
non-market impacts

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Empirical methods for quantification
• Modelling impacts
– Partial equilibrium
– Computable General Equilibrium
– Microsimulation
• NATSEM type
• Behavioural type

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Empirical impact assessment
• Randomised control trials
• Natural experiments (regression discontinuity)
• Regression analysis
• Other statistical methods

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Tools for valuing non-market outcomes
• Stated preference
– Contingent valuation
– Choice modelling
• Revealed preference
– Travel cost
– Hedonic pricing
• Benefit transfer

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Example: Gambling reforms 2008
• Benefits from tax revenue, community service spending and the
enjoyment of gambling for recreational gamblers ranged between
$12.1 and $15.8 billion
• Costs to problem gamblers ranged between $4.7 and $8.4 billion
• Overall net benefits ranged between $3.7 and $11.1 billion.
• Costs and benefits of proposed reforms depended on how much
they reduce both recreational use and problem use
• 10% reduction in harm to problem gamblers generated benefits of
$450 million a year in 2008-09 prices.

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A framework for measuring costs
(From Deep and persistent disadvantage)
Transfers
Expenditure on
regrettables
D
W
L
Economic
spillovers
Foregone
employment
income
Loss of quality of life
for people experiencing
disadvantage
Loss of quality of
life for others
Costs
community
broader
to the
costs
-SoL
Economic
ForegoneGDP
Personal costs of disadvantage
-QoL
costs
Social