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.

1. Regulator. The first component is the entity that creates the rule and dispenses the consequences: the regulator. It is possible for the rule creator to be different from the rule enforcer, but usually these are one and the same. The regulator is typically thought to be a legislature or governmental agency, but such an entity can take the form of various nongovernmental standard-setting bodies (such as the International Organization for Standardization), nonprofit organizations (such as Underwriters Laboratories), industry trade associations (such as the American Chemistry Council), or even business firms themselves when they impose rules on their employees. The distinction between regulation and self-regulation is simply based on who the regulator is. Just as with a government regulation, an industry regulator can adopt rigid technology requirements or deploy more flexible performance- or market-based standards.
2. Target. The second component is the regulatory target, that is, the individual or organization to which a regulatory instrument applies and on whom or which consequences can be imposed. Usually this entity is also the principal factual trigger or frame of reference for the regulation. But that trigger can be smaller or larger. For example, if an air pollution regulation prohibits industrial facilities from emitting pollution from any smokestack above a specified level, the target is still the individual facility, even though the trigger is an individual smokestack. By contrast, an air pollution regulation which has an entire facility as its trigger or frame of reference would thereby allow regulated facilities to vary emissions across different smokestacks, so long as average emissions from each facility do not exceed a specified level. The frame of reference can be broader still with full-blown emissions trading regimes, in which case the entire sector (say, all coal-powered utility plants in the Midwest) can be targeted with an overall emissions reduction, but individual facilities can sell or trade emissions permits. With emissions trading, an individual facility is still the regulated entity in the formal sense that it is subject to the rule (“emit no more pollution than you have permits for”), but the sector is the explicit frame of reference for the regulatory regime.
3. Command. What the rule commands of the target makes up the third component. A rule can direct that a target adopt means or achieve ends. In other words, it can direct the target to engage in or avoid a specific action designed to advance the regulatory goal, such as a command to install ventilation systems or provide employees with protective equipment, or it can compel the target to achieve or avoid a specified outcome related to the regulatory goal, such as a rule stating that emissions shall not exceed a specified level or that workplaces shall not have levels of contaminants in the air exceeding a certain concentration level. In addition, regulation can command the disclosure of information, which can be viewed as either a particular kind of means, such as when disclosure is used to create consumer or shareholder pressure for a target to achieve a desired end, or as the end itself, such as when the regulator seeks the end state of information availability to consumers. Finally, regulatory commands can leave the choice of means and ends to the target, instead requiring it to plan and develop its own internal set of rules aimed at addressing a regulatory problem.
4. Consequences. The normative force of any command must be reinforced with consequences, the fourth component. Consequences can be negative in the form of penalties, such as fines or the loss of a license, or positive in the form of product approvals, regulatory exemptions, or other rewards granted once a target meets the predicate conditions in a rule. Consequences can also be distinguished by what might be considered their functional form. Often consequences take a binary form—in other words, if a rule is violated, a lump sum penalty is issued. With such a binary consequence, it does not matter whether the rule is violated by a small or large degree; the penalty is the same. But consequences can also be applied on an incremental or marginal basis. For example, emissions tax schemes vary the consequences incrementally: for every additional unit of pollution emitted, the target pays a corresponding additional unit of money.

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.

Cary Coglianese is the Edward B. Shils Professor of Law and Professor of Political Science at the University of Pennsylvania, where he also serves as the Director of the Penn Program on Regulation and the faculty advisor to The Regulatory Review.