Remedying Regulatory Diseconomies of Scale

70 Pages Posted: 27 Apr 2013 Last revised: 24 Feb 2014

Date Written: April 26, 2013

Abstract

The modern administrative state recognizes only a limited set of events as triggers of needed regulatory change. Legislatures often direct agencies to act, or administrators independently write rules, when dramatic catastrophes occur or new technologies emerge. This framework ignores a simple yet key event that has contributed to many recent regulatory failures — the volumetric expansion of a common, long-regulated activity. When legislators or agency staff initially write rules to constrain the externalities of an activity, they assume that the activity will occur at a particular scale. Based on the known impacts at this scale, they balance the harms of the regulated activity against the costs of regulation to industry, striking a compromise within the chosen rule (or choosing to not regulate at all).

If the activity later expands from this baseline, the harm-regulatory cost balance becomes precarious. The growing activity sometimes produces more harms, including simple harms, each of which have an independent probability of occurring; these risks can accumulate. Expanding activities can also have effects with interdependent risks that expand disproportionately with the time, density, and location of activity. Finally, growing activities might generate uneven impacts, which are shouldered disproportionately by certain communities. Despite these new harms, the rule governing the activity often does not change. This is due largely to scale blindness in public law — our assumption that familiar activities that we already regulate do not require substantially new remedies.

These harms, combined with a lack of adequate public law response, produce what I call regulatory diseconomies of scale — disproportionately negative impacts sometimes associated with the expansion of a long-regulated activity. There are clear solutions to this problem, and many of them could be applied ex ante: laws could (and sometimes do) include harm thresholds, which impose more stringent controls on individual activities as they and push closer to the threshold. Our laws also could anticipate and avoid various confluences of events — activities occurring at high densities in sensitive environmental areas, for example. Finally, institutions could be designed to automatically grow at certain levels of regulated activity. Regulated actors could pay for the added cost through permitting fees that increased along with expansions in the activity.

These approaches need not be a one-way ratchet: although this Article focuses on potential diseconomies of expanding activity, growing activities may sometimes produce innovations that lead to declining harms, in which case less regulation may be needed. Yet our system of public law often ignores changes in the scale of regulated activity altogether. Risks associated with oil and gas drilling and hydraulic fracturing, as well as older, more persistent environmental challenges, most dramatically highlight the negative aspects of this omission. This Article identifies regulatory diseconomies of scale as a core failure of the modern administrative state and proposes solutions, suggesting how our system of public law — and the institutions that write and implement these laws — must better anticipate and address this phenomenon.

Keywords: administrative law, environmental law, oil and gas, hydraulic fracturing, fracking, fracing, hydrofracking, regulatory lag, regulatory failure, natural resources law, Clean Air Act, Clean Water Act, earthquakes, wastewater, spills, cumulative effects, regulated actors

Suggested Citation

Wiseman, Hannah Jacobs, Remedying Regulatory Diseconomies of Scale (April 26, 2013). Boston University Law Review, Vol. 94, No. 235, 2014, FSU College of Law, Public Law Research Paper No. 637, Available at SSRN: https://ssrn.com/abstract=2257047

Hannah Jacobs Wiseman (Contact Author)

Penn State Law – University Park ( email )

Lewis Katz Building
University Park, PA 16802
United States

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