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Can Government Agencies Regulate Each Other?

November 06, 2015

Many regulatory policies—especially health, safety, and environmental regulations—apply to government agencies as well as private companies, but regulatory implementation and enforcement is often uneven between public and private sectors.

Research conducted by Dr. Manuel P. Teodoro, a political scientist at Texas A&M University, and David Konisky of the School of Public and Environmental Affairs at Indiana University has shown that government entities are less likely to comply with certain federal environmental regulations than are similar entities owned by private companies and that they are less likely to be fined or sanctioned for violations.

The study is summarized in a new Takeaway publication from the Mosbacher Institute for Trade, Economics and Public Policy at the Bush School of Government and Public Service at Texas A&M University. The researchers examined records from 2000 to 2011 for power plants and hospitals regulated under the Clean Air Act and from 2010 to 2013 for water utilities regulated under the Safe Drinking Water Act. The study included over 3,000 power plants, over 1,000 hospitals, and over 4,200 water utilities—some privately owned and others owned by public agencies.

“Our research found that government agencies and private firms confront very different incentives and constraints in the regulatory arena,” said Teodoro. “The primary force driving the difference in regulatory outcomes is the higher political cost of compliance and enforcement for government agencies versus private companies.” 

“Private firms comply when the risk of penalties outweighs the cost of compliance,” says Teodoro. “While government agencies cannot raise revenue to meet regulatory requirements, they rarely have direct competition or face elimination and may have sympathetic political allies,” he added.

The researchers found evidence for power plants, hospitals, and water utilities that indicate that government-owned facilities are more likely to violate standards than are their private-sector counterparts. When they do violate, the government is less likely to come down hard on them. But they also cautioned against leaping to simplistic solutions, such as privatization. Teodoro said further research could include exploring potential ways to reduce the disparities between public- and private-sector compliance and enforcement, warned against rushing to any policy recommendations.

“At this stage we’re still trying to understand the scope of the issue,” Teodoro said. “Privatization is one potential answer, but we don’t yet know enough to identify the best solutions.”

While some observers may suggest the findings present an argument for privatizing regulated services, privatization can lead to other issues, such as a loss of accountability and over-spending for infrastructure.

Privatization “could be a solution, but it has to be put in context,” he said. “Importantly, it’s not the only solution.” Other approaches could include providing stronger incentives and assistance to help public agencies comply with regulations.

The full Takeaway can be found online at http://bush.tamu.edu/mosbacher/takeaway/

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