Academic journal article Trames

Systematic Approach to Economic Regulation of Network Industries in Estonia

Academic journal article Trames

Systematic Approach to Economic Regulation of Network Industries in Estonia

Article excerpt

1. Introduction

Modern society is a regulated system where governments actively intervene in how various spheres of human life are organised. Regulations are put in place to shape and develop markets in a way society deems just and favourable. It is widely accepted that we live in an age of the 'regulatory state' and the R-word has penetrated ever more domains across countries (Baldwin et al. 2012:2).

The economics of regulation is a wide and diverse topic as government intervention in markets has been subject to extensive scholarly research and debate. The fundamental basis of such work is traditionally associated with the dichotomy between public interest theory and public choice theory, and handling of the concept of market failure.

Public interest and public choice constitute two alternative explanations of how human behaviour and motivation impact the objectives and outcomes of regulation. Both theories have attracted a lot of scholarly attention. The idea that particular circumstances systematically cause price-market institutions to produce sub-optimal productive or allocative outcomes (i.e. the markets 'fail') was first introduced in regulatory economics by Bator (1958). A very comprehensive academic account about different types of market failures and corresponding regulation is provided in Breyer (1981). An outstanding discussion of public interest principles is available in Posner (1974), Hantke-Domas (2003) explains recent developments of the theory. Contradictory relationship between individual preferences and aggregated public values is explained in the seminal work of Arrow (1970). Stigler (1971) and Mueller (1976) both give an excellent overview on the earlier public choice literature; Light (2010) provides a good contemporary account.

Although different schools are at odds on a number of phenomena, Shepherd argues that the core of the scholarly debate on regulation comes down to the meaning of effective competition. Effective competition is the prime factor of efficiency, innovation and fairness of markets but its nature is debatable, and its concepts are frequently criticised by those who hold market power but wish to deny it (Shepherd 1990:454). It can be said that, as of the modern day, regulation has reached a state of maturity both in an intellectual and in a practical sense. Intellectually, theoretical perspectives have developed into an impressive body of scholarship and, in practice, a distinct and expanding 'regulatory community' has developed that shares similar languages, concepts and concerns (Baldwin et al. 2012:2)

The development of regulatory 'microcosm' has been ambiguous in the context of economic regulation. Economic regulation attracted more attention in the Anglo-Saxon tradition than in continental Europe because it was in the former where previously untested economic policy tools were pioneered on public utilities. Developments in continental European countries were slower and received gradually more focus due to economic regulatory initiatives taken by the European Union.

The evolution of economic regulation has produced a large variety of approaches and regulatory institutions in different countries, making it therefore critical to fully understand how regulation actually works. For that reason, empirical evaluation of economic regulation has become the mainstream of academic work during the last decade. Coglianese notes that recent years have also evidenced a number of governments establishing formal procedures to analyse new regulatory proposals before they are adopted. Nevertheless, there is still a relative lack of attention to analysing regulations after adopting or evaluating the impact of the whole regulatory process (Coglianese 2012:7).

One reason for that could be that the evaluation of the effects of a regulation is a complicated exercise due to complex interactions that are involved in regulatory processes. …

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