Chapter 7 - Consumer Law and Paternalism: A Framework for Policy Decision-Making

Kate Tokeley

In a free-market economy like that of New Zealand, consumers will often make irrational choices that negatively impact their welfare. In such circumstances policy makers may use regulation to protect consumers. This regulation can be “paternalistic” and requires the government to make potentially controversial decisions as to what is best for consumers, and in doing so, restricts consumer freedom. This paper defines paternalistic consumer law as any law that has the goal of encouraging or coercing consumers to act in a way that is in consumers’ best interests.

The paper proposes a multi-factorial framework to guide paternalistic policy decision-making. First, policy makers need to define the consumer behaviour that they are proposing to regulate. Second, policy makers can consider whether policy factors displace the primary objections against paternalistic laws to render such an intervention legitimate. These factors include: (1) the magnitude of potential consumer harm, (2) the probability of consumer harm, (3) the irreversibility of potential consumer harm, (4) the degree to which addiction is affecting consumer choice, (5) the degree to which consumers want to be protected, (6) the degree to which consumers are dealing with large quantities of complex information they are unable to process, (7) the degree to which the problem is affecting children, young adults or other potentially disadvantaged groups, (8) the degree to which there are additional non-paternalistic reasons for enacting the law, and (9) the probability of non-legal response, such as education or support programmes, failing to provide solutions to the problem within an acceptable timeframe. Third, if the intervention is legitimate, the policy maker needs to decide whether to employ soft measures to nudge the consumer to change their behaviour, or harder, more coercive measures to ensure the law is effective and does not result in unintended consequences.

The framework does not provide definitive answers for all situations. Rather the framework is a useful tool for justifying an intervention in the consumer marketplace.