Correction

The tools in this category are used to correct instances of non-compliance with established regulation. While this certainly includes traditional enforcement methods, the corrective instruments included here cannot be reduced to enforcement – with its law and order policing connotations. They entail a wider range of approaches in achieving the correction of non-compliance.

Taxes

Tax structures may establish incentives and disincentives for behaviours intended to be regulated. While regulatory agencies will not have the power to directly tax, except in the case of fines, which may be regarded as a kind of non-compliance tax, it is possible to establish enforcement regimes within which potential taxes are activated by the findings of a regulators monitoring and inspection operations. In any event, taxes may benefit or hinder regulatory objectives depending upon how adequately and deliberately their consequences are evaluated.

Johnson, Nick, et al. "The environmental consequences of tax differentation by vehicle age in Costa Rica," Journal of Environmental Planning and Management, 44(6) November 2001, 803-814

The authors conduct a simulated evaluation of Costa Rica’s use of increased tax rates on imported used cars, and that tax’s potential environmental benefits. Costa Rica, which has a major motor vehicle pollution problem, has in fact had a fiscal policy that favoured used car importation. A used car tax, though, according to the authors, would provide a valuable proxy for taxes based directly on emission levels. Their simulation suggests that such a tax would entail considerable improvement in the emission levels of several key pollutants.

Macho-Stadler, Ines, and David Perez-Castrillo, "Optimal enforcement policy and firms' emissions and compliance with environmental taxes," Journal of Environmental Economics and Management, 51(1) January 2006, 110-131

In a market where firms with different characteristics decide upon both the level of emissions and their reports, the authors study the optimal audit policy for an enforcement agency whose objective is to minimize the level of emissions. They show that it is optimal to devote the resources primarily to the easiest-to-monitor firms and to those firms that value pollution the less. Moreover, unless the budget for monitoring is very large, there are always firms that do not comply with the environmental objective and others that do comply; but all of them evade the environmental taxes.

West, Sarah E., and Roberton C. Williams III, "Estimates from a consumer demand system: Implications for the incidence of environmental taxes," Journal of Environmental Economics and Management, 47(3) May 2004, 535-558

Most studies suggest that environmental taxes are regressive, making them less attractive policy options. The authors consider the distributional effects of a gasoline tax increase using four incidence measures, under three scenarios for gas tax revenue use. To incorporate behavioral responses, they use Consumer Expenditure Survey data to estimate a consumer demand system that includes gasoline, other goods, and leisure. Their estimates confirm that when revenues are not recycled, a gasoline tax is regressive. Use of incidence measures that ignore demand responses, however, will substantially overstate this regressivity. In contrast, the differences between the equivalent variation and easier-to-implement consumer surplus measures are relatively small. In addition, their results suggest that using the additional gas tax revenue to fund labor tax cuts makes the policy substantially less regressive while using the revenue to fund lump-sum transfers actually makes it progressive.

Structured Public Disclosure

This tool is an indirect enforcement strategy. Typically, a violator’s performance is revealed by the regulator to the general public. The resulting moral and market responses are sought as deterrents to continued non-compliance. Such structured information programs are to be distinguished from the unstructured release of information, such as ad hoc leaks to the press. Public disclosure is a structured approach insofar as the information release is art of a clearly articulated strategy undertaken by the regulator to reveal the performance of the regulated.

Foulon, Jérôme, et al. "Incentives for pollution control: Regulation or information?," Journal of Environmental Economics and Management, 44(1) July 2002, 169-187

The authors compare the merits of traditional regulation and enforcement (fines and penalties) with those of structured information programs – public disclosure. The lack of resources necessary to undertake appropriate monitoring, and the reluctance to use stringent enforcement actions, they say, has long impeded the rigorous enforcement of environmental law, regulations and standards. This has given rise to an increasing number of regulators supplementing the traditional enforcement practices by public disclosure efforts that publicize the polluter’s performance. The authors perform an empirical analysis of the comparative impact of the two strategies within the context of a single program. Their findings confirm that the public disclosure strategy does create additional and strong incentives for pollution control.

Hilson, Chris, "Information disclosure and the regulation of traded product risks," Journal of Environmental Law, 17(3) 2005

Various forms of information disclosure such as labeling requirements, hazard warning and prior informed consent are increasingly being used in the regulation of products that are traded across boundaries. In the context of GATT/WTO jurisprudence, in particular, informational mechanisms are seen as more likely to survive challenge than more traditional regulatory methods such as export and important bans. Even then, there may be legal problems, especially where information requirements relate to production methods as well as to the products themselves. There are a number of distinct normative justifications for information disclosure, including the right to make an informed choice, the need to secure consumer trust, the avoidance of market failure and the right to know. But these are difficult and contested concepts. The current debate concerning EU requirements for the labeling of genetically modified products provides a compelling example of different models at play, which can as a result cause confusion and dissatisfaction amongst different interest groups. Much greater clarification of the justifications for information disclosure is required if their effectiveness as a technique for controlling trade product risk is to be properly assessed.

Regulation-by-litigation

In regulation-by-litigation agencies use enforcement actions against regulated agencies to create new substantive obligations for the regulated. By this means they may obtain substantive provisions through the settlement that they could not have imposed directly on the regulated due to the limits of their mandate. Quite different processes are substituted for the more conventional regulation-by-rulemaking. Litigation replaces notice and comment procedures; a complaint in a legal action replaces a notice of proposed rulemaking; courtroom proceedings and closed settlement negotiations replace a public administrative proceeding; the rules of evidence replace the open rulemaking record; and a limited list of parties largely chosen by the agency replaces open access public participation. Such an approach also eliminates challenges to the agency's compliance through any act establishing its rulemaking limits.

Such measures provide a regulator wider and faster means for addressing perceived violations and threats to the public good. However, such measures also reduce political oversight and control, and reduces the options for direct democratic input of public participation in the regulatory process.

Morriss, Andrew P., et al. "Choosing how to regulate," Harvard Environmental Law Review, 29(1) 2005, 179-250

The authors provide distinctions between three meta-modes of regulation: 1) regulation-by-rulemaking; 2) regulation-by-negotiation; and 3) regulation-by-litigation. While concerned with the contexts that lend themselves to each of these options, the authors are particularly focused on the pros and cons of regulation-by-litigation. They conclude that it provides regulators the ability often to move faster and more effectively in the protectin of the public, however it reduces the effectiveness of political oversight and control of administrative agencies, casting a shadow over its democratic legitimacy.

Engel, Stefanie, "Achieving environmental goals in a world of trade and hidden action: The role of trade policies and eco-labeling," Journal of Environmental Economics and Management, 48(3) November 2004, 1122-1145

Importing countries often resort to trade policies and consumer actions in order to reduce negative environmental impacts of the products they consume. Traditionally, these policies were non-discriminatory, i.e., they treated all imports equally, without considering the actual damages caused by the product. More recently, there is a trend towards process-discriminatory policies which attempt to discriminate against environmentally unsound imports while encouraging sound alternatives The authors develop a theoretical model of the consuming country’s optimal trade policy, allowing for asymmetric information and costly monitoring, and analyze what type of policy is preferable under what conditions.

Rewards and Incentives

Rewards and incentives are regulatory tools that may be characterized as carrot rather than stick. Rewards and incentives are considered more useful than punishments in motivating human behaviour. They are considered to have the further advantage that the efficiency of a market for improvement might be accomplished – trading in a market for rewards will secure the greatest achievement of regulatory impact where it is least expensive. They also avoid the much-discussed dysfunctions of adversarial legalism’s command-and-control regulation with its inefficiencies and rigidities. These tools though are subject to the criticism of those who promote fines and punishments as more effective regulatory tools.

For more reading resources, see Fines and Punishments below.
Gardner, Allison, "Beyond compliance: Regulatory incentives to implement environmental management systems", New York University Environmental Law Journal,11 2003, 662-710

Wang, Hua, and David Wheeler, "Financial incentives and endogenous enforcement in China's pollution levy system," Journal of Environmental Economics and Management, 49(1) January 2005, 174-96

The authors argue that there is a significant deterrent impact with a system that combines progressive financial penalties and self-reporting with few options for contesting regulatory decisions. Further, pollution control through financial incentives has a much greater impact on production processes than on end-of-pipe abatement.

Haucap, Justus, and Roland Kirstein, "Government incentives when pollution permits are durable goods," Public Choice, 115(1-2) 2003, 163-183

Treating pollution permits as durable goods, and a pollution tax as a leasing out of pollution permits, the authors analyze the incentive effects of each for a budget-oriented government. They argue that all types of governments, for reasons of enhanced revenues, prefer a pollution tax system, but this approach does not necessarily best serve the social welfare.

Giulietti, M., and C. Waddams Price, "Incentive regulation and efficient pricing," Annals of Public and Cooperative Economics, 76(1) March 2005

The authors test how firms have responded to the incentives to impose prices in a basket fixed cap on average prices through a review of relative prices within the UK utilities industries. They argue that strategic bahviour dominates short-term profit incentives even after the introduction or threat of competition.

May, Peter J., "Regulation and compliance motivations: Examining different approaches," Public Administration Review, 65(1) January-February 2005

The author examines how traditional regulatory and voluntary approaches affect motivations to address potential harms to water quality. The traditional approach consists of governmental enforcement of mandatory requirements; the voluntary approach consists of government calling attention to potential harms and facilitating actions to address them. These approaches are best thought of as ends of a continuum rather than as the sole choices. Three sets of findings emerge. One, not surprisingly, is that traditional regulation is more effective than the voluntary approach alone. Second, deterrent fears and the sense of duty to comply are important motivations for action. Third, factors that account for the variation in each motivation for which inspections, peer reputation, and attitudes toward government are shown to be important considerations. These findings point to the duality of deterrent fears and civic obligations as motivations to address potential harms.

Fines and Punishments

Fines and punishments are regulatory tools that may be characterized as stick rather than carrot. They operate under the assumption that the regulated will be expected to act as economically self-serving agents. Thus, they will generally avoid compliance where possible and feign compliance whenever necessary. While the diversity of actors in a market encourage a competitor mentality, the small number of agents in a regulatory context encourages a fixer mentality. Thus the regulated are intrinsically motivated to acts of creative compliance that undermine the regulatory objective. Only a regulatory approach that promises to mitigate the economic benefits of non-compliance can be expected to discourage regulatory transgression. These tools though are subject to the criticism of those who promote rewards and incentives as more effective regulatory tools.

Kadambe, Surabhi, and Kathleen Segerson, "On the role of fines as an environmental enforcement tool," Journal of Environmental Planning and Management, 41(2) March 1998, 217-226

In their efforts to evaluate the effectiveness of fines as environmental regulatory instruments, the authors make the distinction between two kinds of effects. A direct effect refers to the effect of an increased fine on the expected cost of a violation, holding the probabilities of enforcement constant. An indirect effect refers to the effect of the fine on the probability of a violation through its effects on the probabilities of enforcement by the regulator. Focusing specifically on the context in which the enforcement process involves significant interaction between violator and enforcer, they argue that, in the absence of indirect effects, increased fines unambiguously promote greater compliance. However, if indirect effects are a factor – say because a change in the fine can change the likelihood that an enforcer will take certain actions, or the likelihood that the violator would challenge the enforcer’s action – the impact of fines is more ambiguous. If such indirect effects are positive and large, an increase in the fine can actually reduce the likelihood of compliance. Hence, they conclude, increased fines are regulatory tools of dubious benefit.

Braithwaite, John, "Rewards and regulations," Journal of Law and Society, 29(1) March 2002, 12-26

The author critically reviews the merits of punishment and rewards in regulation. He takes issue with the view in the responsive (or reflexive) regulatory school that rewards are preferable to punishments in the regulatory process. While rewards have some value when deployed functionally at the bottom of a regulatory pyramid, their general use, he argues, exacerbates free-riding, fosters game playing and defiance, and undermines the motivation for compliance. Rewards encourage “creative compliance,” or “playing to the grey,” in which a strict respecting of the letter of the regulation is respected while its spirit is purposefully undermined. Furthermore, the larger the reward, the more complex the phenomenon being regulated, the worse the creative compliance will be. Also, he states, fear of criticism for having unclear regulations discourages regulators from punishing such creative compliance when it is discovered. Distinguishing between “competitor” and “fixer” mentalities, he notes the confusion of those who want to use market forces for regulatory purposes. In most instances, a competitor mentality is more rational in markets where there are usually too many factors and forces to effectively fix them. In dealing with regulation, however, most regulated only have to deal with one regulator. Hence, it is more rational in this context to use a fixer strategy in the absence of the contestability that is characteristic of markets. This is why creative compliance will usually be the preferred approach of the regulated in such circumstances. Other reasons Braithwaite criticizes rewards is that they can serve to reward recalcitrance and send the message that compliance should pay – hence undermining intrinsic motives and the moral content of the law. Rewards, he concedes, can be effective in regulation under conditions of transparency and weakness of the regulated industry or activity. It also can be useful to induce market place rewards by giving the regulated incentives to compete for those rewards in achieving regulative objectives. Within regulation itself, most use of rewards, he argues, are best kept at the level of informal praise. Praise is usually viewed more as a gift than a reward, so it is less likely to undermine intrinsic motivation. Unlike incentive-based rewards, praise cannot be calculated into the cost-benefit analysis of balancing it against possible punishment.

Stafford, Sarah L., "The effect of punishment on firm compliance with hazardous waste regulations," Journal of Environmental Economics and Management, 44(2) September 2002, 290-308

The author focuses on the record for implementing increased penalties by the U.S. Environmental Protection Agency. Responding to two reports that criticized its application of enforcement penalties, the EPA revised its Resource Conservation and Recovery Act (RCRA) penalty policy. Penalties were increased ten to twenty times over previous levels. They were also structured to “fit the crime,” as it related to probability of harm and degree of deviance. Stafford examines the impact of this new penalty policy on compliance levels with hazardous waste regulation. She finds that, although the EPA’s RCRA Information System shows an increase in detected violations, once inspection levels are incorporated into the analysis through a censored bivariate probit model, violations are revealed to have actually decreased since the penalty change. The decrease in violations appears small relative to the increase in recommended penalty levels. She also finds that inspection and compliance rates are significantly variable across regions.

Spraggon, John, "Testing ambient pollution instruments with hetergeneous agents," Journal of Environmental Economics and Management, 48(2) September 2004, 837-56

The author investigates the ability of ambient pollution instruments to induce a group of heterogeneous agents to choose a target outcome. Based on six controlled laboratory sessions, the data shows that contracts can indeed be developed that induce heterogeneous groups to choose the target outcome. The author, though, does note substantial inefficiency and inequality.

May, Peter J., "Regulation and compliance motivations: Examining different approaches," Public Administration Review, 65(1) January-February 2005

The author examines how traditional regulatory and voluntary approaches affect motivations to address potential harms to water quality. The traditional approach consists of governmental enforcement of mandatory requirements; the voluntary approach consists of government calling attention to potential harms and facilitating actions to address them. These approaches are best thought of as ends of a continuum rather than as the sole choices. Three sets of findings emerge. One, not surprisingly, is that traditional regulation is more effective than the voluntary approach alone. Second, deterrent fears and the sense of duty to comply are important motivations for action. Third, factors that account for the variation in each motivation for which inspections, peer reputation, and attitudes toward government are shown to be important considerations. These findings point to the duality of deterrent fears and civic obligations as motivations to address potential harms.

Middleton, David J., "The legal and regulatory response to solicitors involved in serious fraud," British Journal of Criminology, 45(6) Februrary 2005

The legal and regulatory responses to serious fraud can result in multiple proceedings against the alleged perpetrators. Drawing on a comparison of the regulatory and criminal-justice action taken against solicitors drawn into high-yield investment frauds, the author presents empirical evidence of an apparently more effective regulatory response and considers the problems of multiple or parallel proceedings (including in the civil courts) in the light of recent case law. The differing objectives of regulatory, criminal-justice and civil proceedings are discussed. Finally, he addresses the appropriate legal and regulatory response to dishonesty or serious misconduct by solicitors – an issue that, he says, has received little attention in recent years.