Saturday, May 29, 2010

Costs and benefits of government regulation

In our brief study of market failure we arrived at government intervention as a general solution. Because the market fails to produce the outcome that is best for society on its own, some form of "regulation" of the market is necessary to achieve the socially efficient result.

The imposition of performance standards or technology standards, Pigouvian taxes on negative externalities, the establishment and enforcement of property rights ala Coase, and administration of tradable permit systems (cap & trade) are all examples of regulation.

Importantly, in cases of market failure, regulation is intended to promote economic efficiency - making the size of the "economic pie" larger allows everyone to have a larger slice (at least in theory). Yet "regulation" is often considered a dirty word, and associated with less economic growth. "Deregulation" likewise is often viewed as promoting efficiency. Clearly, there's an argument to be made from both sides of this messy issue, and the realized outcome likely depends on the source and nature of the market failure and government's ability to correct it.

In light of notable recent events, Steven Pearlstein of the Washington Post calls for consideration of not only the costs of regulation, but also the benefits in terms of protecting the public interest and productive natural capital. This is obviously a controversial issue, but this article makes for an interesting read.


Wanda Lewis said...

I agree with this article. We are not putting enough emphasis on the benefits of protecting these low probability events that occur. The chances of an oil spill may be low, but we still need to have regulation in the event that it occurs.

Thomas Cruz said...

In the argument of “regulation” versus “deregulation” I once again bring up the idea of BALANCE.

I agree with the statement that strong and efficient economies require strong and effective government oversight, but I believe that this “oversight” can be in the form of deciding when to regulate and when not to.

I understand the notion that government regulators have failed to protect the public at times and that there are corrupt regulators (as there are corrupt employees in every industry) working for the government – but I also see the public constantly turning to the government, pointing fingers and demanding results and answers when catastrophe strikes.

Clearly regulation is going to increase the cost of doing business, but if there weren’t so many American companies showing complete and total disregard for public health and safety, perhaps so much regulation wouldn’t be necessary.

It is said that regulation overstates cost and understates benefits, which raises another question – exactly how are these costs and benefits distributed? The benefits of regulation aren’t easily quantifiable in terms of cost and quality of life, so how to assess just how beneficial regulation is and if it is causing more harm than good?

Businesses consider regulation a form of government control. I agree. However, I also agree that depending on specific industries and circumstances, government intervention is necessary. Many times businesses even turn to the government for assistance.

Government regulations has broken up monopolies, regulated food, drugs, money supplies, stock market as well as promote safer workplace and cleaner environments.

In certain cases, government regulation isn’t as effective and in fact, backfires creating more problems than it solves. One example is OSHA (Occupational Safety and Health Administration). OSHA is supposed to make the workplace safer for workers but in some cases has proven to be a workers worst nightmare. The government has imposed so many fines on small businesses that it has actually forced many companies out of business with large fines for insignificant infractions.

With the deregulation of the telecommunications industry, lots of new companies surfaced and could compete against the existing monopolies (Baby Bels). More products were offered, prices went down, service improved. In some cases, I believe that deregulation can actually stimulate growth. When there is competition, companies are forced to become more efficient and consumers have more choices – which is the basis of a free market economy.

I would advocate a BALANCE between regulation and deregulation, since clearly, both concepts produce positive and negative outcomes.

Jennifer said...

"Strong and efficient economies require strong and effective government oversight." Perhaps we can decide to view welcoming regulations as preserving life and not giving up freedom? I keep going back to the cultural illness. Maybe we will merge the philosophies of Gandhi with the innovative plans of contemporary natural resource economics. A new culture of thinking that values goodness, honesty, integrity and giving.

Joel Garner said...

I too believe regulation is needed Wanda. The government tends to never put enough emphasis on operations that are making them (the politicians on capital hill) rich. Regulation must be put into effect and i'm sure now it will since millions of americans have been affected by this. However its really too late but we have to realize in cases like these those senators accusing BP of this situation being all thier fault should be exposed for what they didn't do. They are somewhat too blame they should have passed regulation before the drilling began to help prevent situations like these but their pockets were too busy being stuffed with cash!!!