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Regulation and the New Economy


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    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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    Bibliographic Info

    Paper provided by School of Economics, University of Wollongong, NSW, Australia in its series Economics Working Papers with number wp02-18.

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    Length: 18 pages
    Date of creation: 2002
    Date of revision:
    Handle: RePEc:uow:depec1:wp02-18

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    Postal: School of Economics, University of Wollongong, Northfields Avenue, Wollongong NSW 2522 Australia
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    Keywords: New Economy; regulation; government intervention;

    This paper has been announced in the following NEP Reports:


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    1. Gallini, Nancy & Scotchmer, Suzanne, 2001. "Intellectual Property: When Is It the Best Incentive System?," Department of Economics, Working Paper Series qt9wx2c2hz, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    2. Kaul, Inge & Grunberg, Isabelle & Stern, Marc (ed.), 1999. "Global Public Goods: International Cooperation in the 21st Century," OUP Catalogue, Oxford University Press, number 9780195130522, September.
    3. Richard A. Posner, 1978. "Privacy, Secrecy, and Reputation," University of Chicago - George G. Stigler Center for Study of Economy and State 4, Chicago - Center for Study of Economy and State.
    4. Elkin-Koren, Niva & Salzberger, Eli M., 1999. "Law and economics in cyberspace," International Review of Law and Economics, Elsevier, vol. 19(4), pages 553-581, December.
    5. Andrew Dawson, 1998. "The Intellectual Commons: A Rationale for Regulation," Prometheus, Taylor & Francis Journals, vol. 16(3), pages 275-289.
    6. Andrew Graham, 2001. "The Assessment: Economics of the Internet," Oxford Review of Economic Policy, Oxford University Press, vol. 17(2), pages 145-158, Summer.
    7. Richard A. Posner, 1978. "The Right to Privacy," University of Chicago - George G. Stigler Center for Study of Economy and State 2, Chicago - Center for Study of Economy and State.
    8. Adam B. Jaffe & Josh Lerner & Scott Stern, 2002. "Innovation Policy and the Economy, Volume 2," NBER Books, National Bureau of Economic Research, Inc, number jaff02-1, July.
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