Regulation and the New Economy

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.