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Chapter 38
Regulation and the New Economy
B.-C. Lee
(University of Wollongong)
The fundamental theorem of welfare economics asserts
that under conditions of perfect competition Pareto efficiency will obtain.
This has provided the conceptual basis for the market failure approach
to regulation, which focuses on failure to satisfy the conditions for
perfect competition as potentially justifying government intervention
in markets. The approach is evaluated in the context of a number of key
characteristics of the industries of the New Economy. Three areas of regulatory
focus are examined: policy approaches relating to competition, intellectual
property, and information privacy.
It is apparent that the applicability of the market failure approach is
open to question, particularly in regard to competition policy. The exploitation
by dominant market players of what may be termed “natural”
barriers to entry resulting from some of the characteristic features of
the New Economy (scale and scope economies, network effects and consumer
lock-in) should be judged in the light of Schumpeterian competition rather
than that of neoclassical perfect competition. The difficulty facing regulatory
authorities is how to differentiate between situations requiring intervention
and those that do not.
The discussion of intellectual property highlights the fact that, in general,
government intervention is not necessarily the only or even the best solution
to instances of market failure. Finally, the case of information privacy
illustrates how the spillover effects of regulatory actions in one jurisdiction
can impact on other jurisdictions and necessitate coordination in a globalised
economy. The need for countries to cooperate and coordinate their policies
is perhaps the key conclusion of the analysis.
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