The Problematic Incentives of Government Regulation

1
The Problematic Incentives of Government
Regulation

• Presentation by Prof. Howard BaetjerEcon 640,
  April 21, 2009

2
Incentives in government regulation

• Kirzner assumes that regulators are
  well-intendedthat they want what is best for the
  general public.
• Here we relax that assumption. (See Kirzner p.
  445)

3
Contrast the incentives

• Unhampered market
• Private ownership
• Freedom of contract
• Regulation by market discipline

• Government intervention
• Common ownership
• Restriction of freedom to contract
• Regulation by bureaucrats

4
Hairdresser licensing

• What is its avowed purpose?
• How does it work -- what are the institutions?
• What groups are most affected by it?
• Sharissas story
• What are the incentives for licensed hairdressers
  under this institution?

5
Hairdresser licensing

• What appears to be the actual purpose of
  hairdresser licensing?
• Some detail on Marylands licensing law
• The capture theory of regulation

6
Are there civil society alternatives to
hairdresser licensing?

• Legal institutions
• Informal institutions
• Market (for profit) institutions

7
Civil society alternatives to hairdresser
licensing

• Market institutions
• intermediaries that provide information
• salons
• beauty schools (certification)
• information vendors
• like Consumer Reports
• insurance companies

• Legal institutions
• tort liability
• Informal institutions
• reputation
• word of mouth
• Time wounds all heels

8
Are there civil society alternatives to
pharmaceutical regulation?

• Legal institutions
• Informal institutions
• Market institutions

9
Civil society alternatives to pharmaceutical
regulation

• Legal institutions
• tort liability
• Informal institutions
• reputation
• for all parties
• (connected directly to stock price)
• word of mouth
• Time wounds all heels

• Market institutions
• intermediaries that provide information
• hospitals
• pharmacists
• doctors
• information vendors
• e.g. Consumer Reports
• Underwriters Laboratory equivalent
• insurance companies
• for intermediaries
• for drug companies

10
Examples of Type II errors by FDA
Already available in Europe Available in
most industrialized nations
11
Examples of Type II errors by FDA
Already available in Europe Available in
most industrialized nations
12
Examples of Type II errors by FDA
Already available in Europe Available in
most industrialized nations
13
Examples of Type II errors by FDA
Already available in Europe Available in
most industrialized nations
14
Examples of Type II errors by FDA
Already available in Europe Available in
most industrialized nations
15
Examples of Type II errors by FDA
Already available in Europe Available in
most industrialized nations
16
Examples of Type II errors by FDA
Already available in Europe Available in
most industrialized nations
17
Examples of Type II errors by FDA
Already available in Europe Available in
most industrialized nations
18
Examples of Type II errors by FDA
Already available in Europe Available in
most industrialized nations
19
Examples of Type II errors by FDA
Already available in Europe Available in
most industrialized nations
20
Examples of Type II errors by FDA
Already available in Europe Available in
most industrialized nations
21
Fifty years ago, one in 20 Americans needed a
government license to work in their occupation. 
Today that number is close to one in three.  In
1981, there were roughly 80 occupations that
required a license in at least one state.  Today
there are 1,100.  Source Institute for
Justicehttp//www.ij.org/index.php?optioncom_con
tenttaskviewid2668
22
More examples of the capture of regulation by
the regulated group Bootleggers and
Baptists http//www.perc.org/files/bootleggers.pdf
Texas Interior Design http//www.ij.org/index.ph
p?optioncom_contenttaskviewid1239Itemid165
Maryland Horse massage http//www.ij.org/index.ph
p?optioncom_contenttaskviewid2203Itemid165
Minneapolis taxis http//www.ij.org/index.php?opt
ioncom_contenttaskviewid664Itemid165 Campa
ign finance law http//www.youtube.com/watch?v8Pu
6cT6ICQQ Minimum wage laws The USA and the RSA
compared
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The special-interest effectConcentration of
Benefits and Diffusion of Costs

• Special interest group members
• Enjoy concentrated benefits
• --individually large benefits--
• ?
• Each has a strong incentive to
• keep informed,
• organize, lobby,
• spend a lot,
• for the policy.

• Taxpayers/consumers
• Bear diffused costs
• --individually small costs
• ?
• Each has a weak incentive to oppose the policy
• Rational voter ignorance

So whose voices do the politicians hear?