There are often economic, health, safety, environmental, and other benefits that justify regulation. But it is important to keep in mind that many of them create a drag on the economy by imposing costs or stifling innovation and competition. Once implemented, we need to track their impact and periodically reevaluate them. An ongoing goal should be to achieve the original goals at a lower cost.
- What is the purpose of government regulation?
- What are the effects of government regulation?
- How much regulation should there be?
Regulations impose enormous costs on the economy. The annual cost of all government regulation is estimated to be well over one trillion dollars, which is the equivalent of Mexico’s entire economy.
There are often economic, health, safety, environmental, or other benefits to justify many regulations, but it’s still important to keep in mind that most of them create a drag on the economy by imposing costs and stifling innovation and competition.
So how do we regulate smartly and efficiently? First, we need to more independently analyze both the benefits and the costs of proposed regulations before they go into effect.
Second, once they are implemented, we need to measure and track their impact in order to periodically reevaluate them.
But while the solution is straightforward, ensuring unbiased cost-benefit analysis is challenging.
It can be especially confounding when the industry being regulated exercises undue influence over its regulators. This is called “regulatory capture” and can result in regulatory actions that protect existing firms from competitive forces, especially competition from new and innovative firms.
This is particularly problematic because most cost-benefit analyses – if performed at all – are conducted by the same regulatory agency that proposes, designs, and oversees the regulation, which is essentially a conflict of interest. While that agency may have the relevant expertise, it is far from an independent and objective evaluator of its own rules.
Moreover, even if cost-benefit analyses are conducted beforehand, they almost never are re-assessed once the regulation has gone into effect.
The debate ought not to be between a world with and a world without regulation, but rather how to achieve the same objectives at a lower cost.
A far more rigorous implementation of independent cost-benefit analysis would go a long way to making government more efficient and effective.