Tuesday, December 04, 2007

Understanding Government: Regulation

One of the major activities undertaken by government is regulation. Regulations are government rules or laws that govern human activity. They can be distinguished from older laws, such as British Common Law, that proscribe offences against person and property. Regulations instead are usually justified to promote safety, protect the environment, or advance popular social goals.


Regulations have costs, but their costs are mostly not reflected in government spending. The costs of enforcing them are usually only a small part of total government spending. The major costs of regulations are borne by those affected by them.

In fact, regulation can be seen as a hidden form of government taxation and spending. A regulation mandates or prohibits some action. The mandated or allowed alternative way of achieving a goal must be more expensive, or else it would already be used without need of a regulation. But if some additional amount of money were given along with the mandated or allowed way, it would be more economical than the more efficient alternative.

Now imagine that this amount of money was taken from someone and then given back to him on the condition that uses the mandated or allowed alternative. But this is the same as if the regulation is simply mandated. Thus regulations can be looked at as a combination of taxation and spending. They have monetary costs.

This cost is hidden, and is far higher than most people realize. The Competitive Enterprise Institute issued a report entitled Ten Thousand Commandments which estimates the total cost of all federal government regulations in 2005 was 1.13 trillion dollars. This compares to total federal spending in 2007 of 2.78 trillion dollars. The list of all proposed and final federal regulations in 2005 was 73,870 pages long.

Actually, the costs are even higher because regulations often create perverse incentives that encourage wasteful actions.


The most common justification for government regulations is to protect safety. This could be the safety of products, services, food, jobs, or anything else. The implication is that without government regulations, these things would be unsafe or less safe.

One problem with this argument is that there is no such thing as absolute safety in this world. There is always some risk. Something can be more safe or less safe than something else, but it can never be completely safe.

Are government regulations the best way to achieve "safety"? Presumably, consumers would not knowingly buy "unsafe" products. Would a business sell products that it knows to be dangerous? If it does, it is almost certain to be exposed. Its reputation would be significantly damaged, and it might well go out of business. Thus businesses have a significant incentive to make their products as safe as possible at a given price and quickly correct any mistakes that they make. Thus businesses often issue voluntary recalls of products.

Beyond this, businesses that knowingly sell defective products can be prosecuted. They can also be sued in civil courts. Both of these possibilities further encourage businesses to promote safety. But government regulations are different because they seek to dictate safer behaviors ahead of time.

What reason is there to believe that government knows better how to make products safe than private businesses do? Government may issue regulations that make products cost more but make no difference in terms of safety. The regulations it issues may actually make products less safe.

Government regulations may well make products more safe. But this is not necessarily a good thing irrespective of cost. Thinking of safety as categorical rather than relative tends to encourage regulators ignore the costs of regulations. But regulations must make products and services more expensive.

This can actually make people less safe. If some product is made more expensive by regulations, people may switch to an alternative that is less safe than the original product. Alternatively, the money that is spent on a more expensive product could be used to increase safety in some other way. Government regulations may also promote a false sense of security that can lead people to behave more dangerously.

Further, the money spent satisfying a regulation could be used to increase happiness in some other way. But government has no way to know how safe is safe enough. Only the free market can determine this.


Government regulators face very different incentives than businesses. They are much less likely to suffer the consequences of making mistakes. The consequences of not regulating are often much more visible than the consequences of regulating. Thus many unnecessary and harmful regulations are created.

One particularly disastrous example of this is the Food and Drug Administration. Prescription drugs can save thousands of lives, but they sometimes have side effects that can hurt a few people. The FDA holds up approving drugs for many years, and thousands of people die needlessly.

Another example of government regulations in action is Corporate Average Fuel Economy (CAFE) standards, which seek to increase the gas mileage of cars. But government regulations cannot magically make cars more fuel efficient. Instead, they increase the price of larger cars and force more people into smaller, less safe cars. This increases the number of deaths in car crashes.


Government also creates regulations with the stated goal of protecting the environment. Such regulations often infringe on property rights, discourage production, and increase poverty. Actually, this is often exactly what environmentalists want. One disastrous example of environmental regulations is government efforts to eliminate the use of DDT, which caused millions of needless malaria deaths in the third world.

Some environmental regulations are necessary. For example, pollution can infringe on the rights of others. But even in this case, stricter regulations are not always better. At some point, the cost of stricter regulations will outweigh the benefits.


Why are regulations of business so widespread? Concerns about safety and a bias toward government are only part of the answer. A major explanation is that businesses often support government regulations. They support regulations that will damage their competitors and not themselves, or damage their competitors more than themselves, or prevent new competitors from forming. With less competition, businesses can make larger profits. However, such regulations hurt consumers.

A common phenomenon is 'capturing', in which a panel or agency that regulates some industry becomes captured by that industry. This happens because the industry in question has the largest interest in the contents of the regulations, and so works hardest to influence the agency. When an agency has been captured, regulations can be neutralized, or written to benefit the industry, or to punish competitors.

One particular form of regulation that restricts competition is licensing. This is presented as necessary for safety. But it is a restriction of competition that increases prices for consumers.


Regulations are also used by government politicians and bureaucrats to control people. They take away freedom and give government more power over people's lives.

Regulation is a major activity of government and is usually destructive. It depends on the threat of force or violence. It is a hidden form of taxation and spending, and it costs far more than most people realize. The free market can better promote safety than government regulations. Regulations can be used by business to restrict competition and increase prices. Most government regulations should be eliminated.

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