Regulation’s Four Core Components

Regulations can vary greatly. They can take the form of technology requirements, design standards, product specifications, performance standards, information disclosure, behavioral taxes, self-regulation, tradable permits, process standards, management-based regulation, and more … not to mention the dreaded “command-and-control regulation.” Some years ago, Indiana University professor Kenneth Richards published an article with an appendix that summarized more than a dozen different regulatory taxonomies, each containing about six or seven different labels used to describe discrete policy instruments used to achieve regulatory goals. It’s hard to make sense of all the available options captured by the varied terminology. Yet even though the array of instruments available to any regulator may seem dizzyingly large, regulatory tools all share a core of common attributes. All regulatory instruments consist of some rule or rule-like statement having normative force and backed up with some type of consequences. Given the core similarities across all regulations, the differences between the myriad regulatory instruments can be explained in terms of four components: the regulator, the target, the type of command, and the type of consequences. Understanding these four key parts of any regulation can help decisionmakers select appropriate responses to problems requiring some kind of regulatory intervention. These core regulatory components—regulator, target, command, and consequences—affect the incentives and flexibility that a regulation provides. Regulated businesses will have maximal flexibility when the regulator is the industry itself. Yet even when the regulator is the government, choices made about variables such as the target and command will affect how much flexibility and responsibility for problem-solving that businesses have in addressing the public concerns motivating regulation. A command that dictates achievement of an end-state allows firms to determine how to achieve that dictated end-state—and the closer that commanded end-state is to the motivating purpose or ultimate end state of a performance standard, the greater the flexibility it will generally afford. On the other hand, a command that merely dictates planning, and allows firms to choose specific actions or objectives, gives firms still more flexibility. Rather than getting caught up in the semantics of how different people describe different approaches to regulation, policymakers, analysts, and researchers may find it is clearer and more helpful simply to keep in mind the four core components of any regulatory intervention