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Evaluate the scope for risk of regulatory failure in Defra’s policies - BR0111

Economic Insight is delighted to have the opportunity to respond to Defra’s competition for research proposals relating to evidence for regulatory reform. Our proposal relates only to Project 3 (as described in Defra’s Project Specification document) and thus sets out our views as to what new research should be taken forward to help meet Defra’s wider objectives.
We will assess the scope for regulatory failure risks in key Defra policy areas.
Our proposal is to undertake a narrowly focused piece of work that seeks to identify and evaluate the scope for regulatory failure risks in Defra’s key policy areas (where regulatory failure relates to the risk of regulation either: (i) not fully meeting its intended objectives; or (ii) resulting in unanticipated and undesirable outcomes).
Our study will be largely qualitative in nature, but will be rooted in robust economic theory. We will deliver a report to Defra that makes clear recommendations as to how future regulation could be developed in a more efficient and targeted way, based on an evaluation of regulatory failure risks.
Our proposed approach will deliver new insights for Defra regarding future regulatory reform, whilst also representing excellent value for money.
Our approach has two key benefits to Defra:
• it will provide a genuinely new perspective as to how Defra should evaluate its existing policy areas with regard to the wider regulatory reform agenda;
• being narrowly focused, it will be cost effective and will provide excellent value for money to Defra.
Our study will provide additional findings and insights that are very much complementary to Defra’s existing and planned research programme. In particular, we are aware that Defra has already undertaken an initial cost-benefit analysis of its regulatory stock, which represents an important step in developing an evidence base to support regulatory reform. As Defra’s analysis (rightly) started from the existing evidence base, it did not explicitly include a fresh examination of regulatory failure risks. Consequently our study will not only provide findings that should, in any case, be considered alongside Defra’s existing analysis, but will also help Defra make decisions regarding prioritisation areas for reform where existing evidence is inconclusive.
The importance of understanding the scope for regulatory failure risks is well established in economics – recent regulatory and economic events serve to illustrate this further.
The importance of assessing the scope for regulatory failure risks when designing and reforming regulation is well established in the economics literature.
In addition, we note that Ofcom’s recent decision to deregulate Royal Mail Group was based almost entirely on concerns regarding the scope for regulatory failure, rather than more traditional economic arguments relating to the degree of competition in markets, market failures, or formal cost-benefit analysis. There is also now an extensive debate regarding the extent to which the 2008 liquidity crisis was due to market or regulatory failures. Both cases illustrate how radical changes in regulatory scope and approach can be based largely on the evaluation of regulatory failure risks.
General project aims

Our proposed study constitutes a qualitative assessment of the scope for regulatory failure risks in Defra’s key policy areas, based on first principles economics. The study will draw out the implications of any identified risks for the regulatory reform agenda; and specifically will make recommendations to Defra regarding what the regulatory failure risk assessment might imply for developing regulation in a way that is more efficient and better targeted.

Regulatory failure relates to the risk of regulation either: not fully meeting its intended objectives (and so not delivering its anticipated benefits); or resulting in unanticipated and undesirable outcomes (from an economic welfare perspective). Regulatory failure risks tend to arise for one of four reasons:

• Regulatory capture: where stakeholders successfully subvert the regulatory process so that it serves their own ends rather than meeting its intended goals.
• Lack of compliance: where stakeholders do not behave as intended within the regulatory framework so that its objectives are not met.
• Regulatory design: where the specific way in which regulation is designed and implemented means that it will not meet its objectives.
• Absence of regulatory solution: cases where there simply is no appropriate regulatory design that would meet the intended objective in a way that was net beneficial.

Specific objectives

Our proposed study has three key objectives.

1. To identify the key potential regulatory failure risks of relevance to Defra’s policy areas.

2. To provide a qualitative assessment of both the likelihood of those risks materialising; and the consequences to key stakeholders were they to do so.

3. To provide clear recommendations to Defra as to what the above findings imply for the regulatory reform agenda – and in particular to draw out the implications for developing more efficient and targeted regulation in future.
Project Documents
• FRP - Final Report : Economic Insights - Risk of Regulatory Failure - Final report   (1047k)
Time-Scale and Cost
From: 2011

To: 2012

Cost: £16,800
Contractor / Funded Organisations
Economic Insight Ltd
Better Regulation              
Regulatory policy