Tuesday, October 2, 2007

Regulation and Information

Regulations have another distorting effect on the economy. Regulated businesses must pay for services (such as from lawyers and accountants) and products necessary to meet the regulations. Costs of all of the businesses’ products and services are likely to go up to compensate for loss in profits, and these increases are passed through the supply chains of businesses that use their products and services. Effectively, a supporting industry is created by and dependent on any given set of regulations, which arguably tends to reduce the efficiencies of everyone affected by them (by providing misleading indicators of supply and demand to the market through elevated prices).

I consider regulations to be “workarounds” (or quick fixes) to problems, rather than actual solutions. Like taxes that continue being levied after jump-starting demand for products based on new technology, they have limitations to their usefulness: They should just buy time until the required substantive changes to production practices are implemented.

In my view, a better role for government in the economy would be to ensure that consumers have complete, accurate, and useful information about what they purchase, above and beyond the vague rule-of-thumb indications of demand and supply that they get from price alone. This would in fact be one of the key roles of the “central processor” in my version of an ideal world, where people must be able to judge the impact of their actions on longevity and quality of life.

No comments: