Improving Regulatory Systems

Recommendations and Actions

REG02: Encourage More Innovative Approaches to Regulation


One of the biggest challenges federal regulators face is choosing the best tool to solve the problem. In many cases, non-regulatory approaches may be the best solution. These include efforts to spur technological innovation, information disclosure, and consumer education. For example:

--To address the problem of airline delays, the Department of Consumer Affairs at the Department of Transportation (DOT) publishes the monthly Air Travel Consumer Report comparing actual and scheduled arrivals and departures.[Endnote 1]

--For 8 years, the Department of Agriculture's Food Safety and Inspection Service has operated a toll-free food-safety hotline, to provide meat and poultry consumers with information regarding food- borne illnesses[Endnote 2]

--The Environmental Protection Agency (EPA) served as a catalyst in the creation of a "Golden Carrot" program--a private-sector initiative to spur development of a more energy-efficient and environmentally friendly refrigerator by providing monetary rebates to the manufacturer of a winning design[Endnote 3]

--Regulation by state or local governments may also be an alternative to direct federal regulation.

If regulation is necessary, agencies must balance a number of considerations in selecting the best regulatory approach, including fairness, enforceability, and impact on regulated industries. One of the major factors regulators must consider in choosing among alternative approaches is the cost to the regulated industry and to the government.


The government is obligated to see that the money spent to achieve health, safety, environmental, economic, and social objectives is spent wisely. Regulation to achieve these goals imposes significant costs on those being regulated.[Endnote 4] For example, industries may be required to pay for installing equipment to reduce pollution, for investing in monitoring systems to meet worker health standards, and even for hiring additional personnel to maintain compliance records.

EPA estimates that the proportion of the gross national product (GNP) devoted to environmental protection alone will rise from 1.9 percent in 1990 to 2.7 percent in the year 2000, with the private sector bearing most of these costs.[Endnote 5] The National Highway Traffic Safety Administration (NHTSA) and the Federal Highway Administration (FHWA) estimate that between 1966 and 1990 the federal and state governments and the automobile industry spent an average of $6.[Endnote 5] billion annually on highway, traffic, and motor vehicle safety.[Endnote 6]

Agencies have traditionally used command-and-control regulations. Under this approach, the agency dictates what individual firms must do to meet an established standard or goal and enforces those dictates. For example, environmental regulations may require the use of specific pollution control devices; inspection systems may require performance of specific procedures; or agency officials may themselves decide on allocation of rights to exploit natural resources. No doubt exists that a command-and-control approach is appropriate--and indeed necessary--in certain cases. For example, where risks that would result from noncompliance are high, as in the regulation of nuclear power, command-and-control may be the only feasible regulatory approach.

Experience has shown that in some situations, however, costs of meeting regulatory goals can be significantly reduced by choosing approaches that rely more on market mechanisms. Such mechanisms place more decisions in the hands of the private sector, provide greater flexibility to regulated industries, and encourage innovation. Market-oriented regulation decentralizes decisionmaking, allowing the market to find the most cost-effective solution to a particular regulatory goal. Unlike command-and-control, market- oriented regulation provides greater flexibility to regulated industries and encourages innovation.


Tapping the forces of the market can also produce more effective regulation. Deposit-refund systems for beverage containers ("bottle bills"), which have been mandated by a number of states, demonstrate how powerful economic incentives can be in influencing the behavior of large numbers of people. Heightened public awareness about the problems which regulation attempts to address can also have an impact on the degree to which overall objectives are attained. For example, automakers are now competing to provide safety features, such as airbags and anti-lock brakes.

How a regulation is designed has implications for its enforceability, which is often critical to overall effectiveness. The deposit-refund system relies very little on traditional enforcement mechanisms. Effectiveness of command-and-control regulations, on the other hand, depends directly on enforcement. Lax enforcement is likely to lower compliance significantly. Because enforcement resources are limited, agencies should also consider innovative approaches to enforcement, such as use of auditors, to improve regulatory programs.[Endnote 7]


Among the regulatory approaches that allow greater flexibility for the private sector and make use of market forces are:

--performance standards,

--marketable permits,

--monetary incentives, and

--information disclosure.[Endnote 8]

"Performance" standards are generally preferable to "prescriptive" or "design" standards because they give the regulated industry the flexibility to determine the best technology to meet established standards. For example, a design standard for ladders might specify the materials and exact dimensions to be used, whereas a performance standard might simply require that the ladder support a minimum weight and provide a minimum degree of stability. The Occupational Safety and Health Administration (OSHA) has sometimes been criticized for prescriptive design standards for plants and equipment relating to worker safety.[Endnote 9] In 1990, OSHA initiated rulemaking on ladders and scaffolding to convert to performance standards where possible. The proposal followed complaints by industry that current standards provided insufficient flexibility and inhibited technological developments.[Endnote 10]

The EPA's "bubble" concept for limiting pollution emissions is a type of performance standard. Under the bubble concept, overall emission limits are established for a single facility or a group of facilities, rather than from each source in the facility. This allows companies greater flexibility in choosing which emissions source(s) to reduce to meet the overall limit for emissions from the bubble. EPA estimated that facilities under the 80 or so bubbles established prior to 1986 saved $435 million in meeting emissions standards.[Endnote 11]

"Marketable permits" allow the market, rather than the government, to distribute scarce resources. The 1990 Clean Air Act Amendments establish an allowance trading system for sulfur dioxide emissions from utilities, in an effort to reduce acid rain.[Endnote 12] Utilities are allowed to trade initially allocated allowances, each representing one ton of emissions. This allows more of the reduction in emissions to be done by those plants that can reduce emissions at lower costs. EPA estimates that this system will save from $700 million to $1 billion per year.[Endnote 13]

In 1985, DOT issued a rule allowing airlines to buy and sell airport takeoff and landing rights (slots) at four major airports.[Endnote 14] Previously, these slots had been allocated by a committee, which frequently deadlocked. Under the new system, the value of the slots is determined by the market, which should allocate them most efficiently. Similarly, in 1990, the National Marine Fisheries Service implemented a transferable quota system for allocating fishery harvesting privileges in the New England and Mid- Atlantic regions.[Endnote 15]

"Monetary incentives", if correctly set, can be effective in influencing behavior. More than 100 communities now charge for garbage collection on the basis of volume. Because households have an incentive to reduce the amount of garbage generated, the effect has been to reduce tonnage collected and to increase recycling. Many states and counties also tax auto tires to pay for disposal. In a like manner, 10 states have implemented deposit-refund systems for lead batteries to ensure proper disposal.[Endnote 16]

"Information disclosure" provides consumers with information they need to make informed choices.[Endnote 17] Labels, routinely required on such products as over- the-counter drugs and pesticides, are probably the most common form of information disclosure. NHTSA provides information on tire safety to consumers by requiring manufacturers to grade and mark tires based on a testing protocol to measure traction, treadwear, and temperature resistance, factors relating to safety.[Endnote 18]

Information disclosure requirements can also provide an incentive to industries to move toward regulatory objectives. For example, the Federal Trade Commission's introduction of standard test procedures for tar and nicotine content in cigarettes helped lead to the introduction of low-tar cigarettes.[Endnote 19] The Emergency Planning and Community-Right-to-Know Act of 1986[Endnote 20] requires companies to disclose information on the use and release of hazardous chemicals. EPA attributes a significant portion of the 31 percent decrease in air emissions of these hazardous chemicals to voluntary reductions brought about by increased industry and public awareness of emission levels.[Endnote 21]


Federal agencies, for a number of years, have been encouraged to use alternative approaches to regulation, including more market-oriented regulation. President Carter in a 1980 Presidential Memorandum directed the agencies to find areas where alternative techniques could be used in both existing and new programs. Carter's Regulatory Council created a short-lived Project on Alternative Regulatory Approaches, which published a series of guides describing alternative approaches.[Endnote 22] Under his and later executive orders, agencies were required to include, in their regulatory analyses of all major rules, a discussion of alternative approaches considered. Presidents Reagan and Bush also supported use of market-oriented approaches.

Despite more than a decade of high-level support, innovative approaches are not widely used by agencies. There are a number of constraints to more widespread use. Congress and agencies commonly respond to problems by pulling the familiar command- and-control tool out of the toolbox. It is always easier to model a new program after an old one, and most often, existing regulations are command-and- control. Lack of information and knowledge about when other tools should be used is a significant constraint to introduction of innovative techniques. Even where agency staffs have expertise in designing innovative regulation, their ideas may not be accepted without strong support from agency leadership. Agencies generally do not actively ask for ideas for regulatory approaches from the regulated industry or interest groups. On the other hand, regulated entities may prefer command-and- control regulations or prescriptive standards over performance standards because they provide more specific details on the requirements for compliance. Finally, statutes may not give agencies sufficient discretion in designing a regulatory approach.


1. Establish use of innovative regulatory approaches as administration policy. (2)

The President should direct agency heads to use innovative regulatory approaches whenever they are appropriate. This is consistent with the new regulatory review executive order. Wider use of such approaches to regulation can lower the costs of meeting regulatory goals by giving regulated entities more flexibility and increasing the economic efficiency of regulations. However, innovative approaches are not the best solutions in some circumstances. Agencies should analyze the strengths, weaknesses, and limits of particular approaches to match the best regulatory approach to the problem.

Redirecting the regulatory system from the command- and-control end of the regulatory spectrum toward more flexible and market-oriented approaches will require strong leadership. The President should also direct the Regulatory Coordinating Group to work with Congress and policy makers to incorporate more innovative approaches in legislation and regulation. A standing task force on innovative approaches could assist this effort, and would provide a good forum for communication among government regulators.

2. Develop a Deskbook on Regulatory Design. (1)

The Chair of the Regulatory Coordinating Group (RCG) should oversee the development of a "Deskbook on Regulatory Design" for legislative and regulatory staffs, which should be completed in less than one year. The "Deskbook" would improve understanding of the full range of alternative approaches by providing both policymakers and staff with ready information about the range of regulatory approaches. It would also identify resource people within agencies who could assist others in development of innovative approaches. Project staff should work closely with congressional regulatory specialists in developing the Deskbook.

The Deskbook should describe in detail the conditions under which each approach should be considered. Possible combinations of approaches should also be discussed. In this context, the Deskbook should highlight the strengths, weaknesses, and limitations of each approach. Market-oriented approaches, though they may be more economically efficient, can be difficult to design and are not appropriate in all circumstances.[Endnote 23] In drafting the "Deskbook", the RCG should consult on existing sources, such as the handbooks prepared by the Regulatory Council in the 1970s and the experience of Germany and other European countries.[Endnote 24]

The Deskbook should also provide an in-depth survey of how innovative approaches have been used in both federal and state governments. Case studies should be used for each approach. Case studies should look at not only the design of the regulation, but also the effectiveness of implementation.[Endnote 25]

Attention should also be paid to other innovative features, including tiering, or tailoring regulatory requirements to match circumstances of the regulated entities. Agencies may, for example, use cut-offs (e.g., number of employees) in applying certain regulatory requirements or may make appropriate provisions for small businesses (e.g., short forms for reporting requirements).

The Deskbook should be designed in a format to accommodate new information, so that it can be regularly updated. In addition to printed versions, the Deskbook should be made available in electronic format to maximize its usefulness. An electronic format could be updated more frequently and could provide more extensive information, such as actual texts of regulations, as well as additional commentary on the development and monitoring of such regulations.


Department of Labor, DOL07: Redirect Mine Safety and Health Administration's Role in Mine Equipment Regulation; and DOL10: Refocus the Responsibility for Ensuring Workplace Safety and Health.

Department of Transportation, DOT02: Streamline the Enforcement Process.

Environmental Protection Agency, EPA01: Improve Environmental Protection through Increased Flexibility for Local Government; EPA04: Promote the Use of Economic and Market-based Approaches to Reduce Water Pollution; and EPA05: Increase Private Sector Partnerships to Accelerate the Development of Innovative Technologies.


1. Telephone interview with Norman A. Strickman, Chief, Consumer Affairs Division, Office of the Secretary of Transportation, August 13, 1993.

2. Telephone interview with Susan Conley, Manager, Meat and Poultry Hotline, Food Safety and Inspection Service, U.S. Department of Agriculture, August 17, 1993.

3. Telephone interview with Mike L'Ecuyer, Environmental Protection Specialist, Environmental Protection Agency, August 2, 1993.

4. Estimates of the total cost to the private sector of complying with federal regulation range from $430 billion to $562 billion annually. See Office of Management and Budget, Budget of the United States Government Fiscal Year 1993 (Washington, D.C., 1992), p. 397 for a discussion based on Hopkins, Thomas D., Cost of Regulation, Public Policy Working Paper (Rochester Institute of Technology, December 1991).

5. Environmental Protection Agency, Environmental Investments: The Cost of a Clean Environment, Report of the Administrator of the Environmental Protection Agency to the Congress of the United States (Washington, D.C., November 1990).

6. National Highway Traffic Safety Administration and the Federal Highway Administration, Moving America More Safely: An Analysis of the Risks of Highway Travel and the Benefits of Federal Highway, Traffic, and Motor Vehicle Safety Programs (September 1991), p. 30. The agencies estimate that these programs produced benefits totaling $380 billion due to averted injuries and deaths. All figures are 1990 dollars.

7. For example, it would be interesting to see whether, in the environmental, health, and safety areas, independent auditors could supplement or enhance existing enforcement efforts. Agencies could require high-risk firms or firms with a high violation rate to use an independent certified auditor to verify compliance with regulations, including reporting requirements. Auditors could also serve as consultants to firms to identify where further compliance efforts were needed and how to best correct problem areas. The Federal Aviation Administration currently designates private persons to act as representatives of the administrator in examining, inspecting, and testing persons and aircraft for the purpose of issuing airman and aircraft certificates. 14 C.F.R. Part 183.

8. For general discussions of economic incentives see Carlin, Alan, Environmental Protection Agency, The United States Experience with Economic Incentives to Control Environmental Pollution (Washington, D.C., July 1992); and Office of Management and Budget, Regulatory Program of the United States Government, April 1, 1992 - March 31, 1993 (Washington, D.C., January 1993), pp. 11-19.

9. Nichols, Albert, and Richard Zeckhauser. "OSHA after a Decade: A Time for Reason," in Leonard W. Weiss and Michael W. Klass, eds., Case Studies in Regulation. Revolution and Reform (Boston: Little, Brown and Company, 1981).

10. Telephone interview with Terry Smith, Occupational Safety and Health Specialist, Occupational Safety and Health Administration, July 27, 1993. See 55 FR 13360 (April 10, 1990).

11. Creekmore, Andrew T., "Emission Trades for Sources of Volatile Organic Compounds," paper presented at a conference of the Air and Waste Management Association Annual Meeting, 1989. In Carlin, Chapter 3, note 8.

12. Title IV of the Clean Air Act, 42 U.S.C. 7651- 7651o (1991 Supp.).

13. 56 FR 63002-63351 (December 3, 1991).

14. 14 C.F.R. 93.121-93.133, 93.211-93.227.

15. 50 C.F.R. Part 652.

16. Carlin, Chapter 3, note 8.

17. Project on Alternative Regulatory Approaches, Information Disclosure (Washington, D.C., September 1981).

18. 49 C.F.R. 575.104.

19. Project on Alternative Regulatory Approaches, Information Disclosure, p. 17.

20. 42 U.S.C. 11001-11050 (1988).

21. Environmental Protection Agency, 1991 Toxics Release Inventory (Washington, D.C., May 1993), p. 6.

22. Publications under the Project on Alternative Regulatory Approaches include Marketable Rights, Performance Standards, Monetary Incentives, Information Disclosure, and Tiering. Copies may be obtained through the Administrative Conference of the United States (ACUS).

23. The impact of market-oriented approaches is sometimes more difficult to predict. For example, nationwide trading systems for pollution can result in heavier pollution emissions in some locations than would have occurred under a command-and-control approach. For example, a nationwide marketable permit system generally would not be appropriate for solving a local pollution problem.

24. See note 22. Also for foreign experience see Organization for Economic Co-Operation and Development (OECD), Economic Instruments for Environmental Protection (Paris, 1989).

25. The effectiveness of traditional command-and- control regulation depends heavily on enforcement efforts. The Deskbook should examine effectiveness of regulation not only from the perspective of regulatory design, but also from the enforcement perspective. It should discuss innovative approaches to enforcement, including the use of private audits.

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