SERVICE REGULATION

Market Failures and Policy Goals

Regulation is the tool that governments have to correct market failures such as information asymmetries,
and to meet important public policy objectives such as universal access to key services.

The table below summarizes some market failures and policy goals, the service sectors usually involved,
the policy objective behind the regulation of the sectors and the various regulations that can help in each
context.

Type of market failure Sectors affected Policy Objective Appropriate

or policy goal Regulations
Market failure: Natural Network industries, - Avoid duplicating - Information on price
monopoly or oligopoly such as water, fixed costs setting
electricity, - Reduce high prices - Price surveillance or
telecommunications, resulting from limited mandatory price caps
transport; and competition - Cross-subsidies
liberalized former - Splitting of networks
monopolies from service provision
- Competition policy
rules, including
limitations on market
shares

Market failure: Financial, insurance - Protect consumers - Licensing

Asymmetric and professional - Reduce consumer - Education
information between services safety concerns requirements
producer and - Guarantee quality - Minimum skill
consumer and safety of service requirements for
prior to consumption services providers
- Quality control
- Publication
requirements on costs,
risks, side-effects
- Mandatory
professional liability
insurance.

Policy goal: Universal Transport or - Ensure that all - Cross-subsidization

access telecommunication citizens have access to schemes to ensure
sectors, health care, essential services. that revenues in
education profitable areas are
reinvested in
underdeveloped
regions or persons in
financial need
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 - Licensing conditions
including “universal
service obligations”
(e.g. commercial
hospitals are required
to treat a certain
percentage free of
charge)

Policy goal: Financial services - Ensure - Minimum capital

Macroeconomic macroeconomic requirements
stability stability - Higher capital
- Regulate financial reserves when new
instruments to financial instruments
guarantee they are are released
prudent and correctly - Diversification of
understood assets to limit
- Avoid loss of exposure to individual
confidence in financial clients
instruments - Reporting of activities

Policy goal: Tourism, retail, - Promote social - Taxes to internalize

Environmental transportation sectors welfare rationale the externalities
protection - Reduce negative - Rural and urban
environmental planning measures
externalities - Traffic restrictions on
- Conserve the certain days or in
environment sensitive areas
- Supporting the use of
public transport

Policy goal: Upgrading
of technology
All sectors, especially
those more dependent
on technology and
skills transfer, i.e.
financial services and
telecommunications.
- Generate positive
spillover effects for
other domestic firms
- Restrictions on legal
form of investment
- Rules on local
employment of
personnel / directors

Source: Based on Table 4.1. Instruments for Addressing Market Failures Affecting Trade in Services, p. 96 in World Bank, Valuing
Services in Trade: A Toolkit for Competitiveness Diagnostics, 2014. ; & Disciplines on Domestic Regulation pursuant to GATS Article
VI.4, Background and Current State of Play, briefing document prepared by the Trade in Services Division of the WTO Secretariat,
June 2011.

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