The Role of Regulators

Published on Author Zach WareLeave a comment

The role of government regulators grew in the early part of the 20th century. Regulators serve two purposes, sometimes but not always concurrently: Protect workers and protect consumers.

Their rise made sense at the time. Companies like Standard Oil were dominating markets and using their dominance to artificially create inflate profits, harming consumers. The Sherman Antitrust Act specifically targeted such companies and gave the FTC the power to intervene to protect consumers on a macro level.

The story of taxis in Las Vegas took a different path. The barrier to entry into the Las Vegas taxi market in the 1950s was so low that anyone could get into the business. Because there were so many taxis drivers competed on price. As always happens in price-sensitive markets, eventually pricing pressure pushes down the quality of the product. In this case that meant that cars got less safe, drivers were more careless and as the market evolved, riders were very much in danger. The regulators established and enforced safety standards by requiring licenses to operate. And safety improved.

In the case of every regulated market the regulation morphs over time from safety-oriented to market protection oriented. I don’t think this happens intentionally but it always happens.

What at one point was a regulator focused solely on consumer safety turns into one that regulates pricing and decide who can enter the business. The regulator thinks those things keep consumers safe. But the process always get skewered.

Regulators use licensing and application requirements to slow market growth thus protecting pricing from huge swings. Rarely do they accomplish this without unduly blocking access to markets from nearly anyone.1

In Nevada, for example, new applicants for a transportation license must prove market demand and disclose pricing in their applications. Any existing provider may object and if they do, procedures essentially block the new participant from the market. A potential competitor may simply object to your desire to enter the market and, poof, they win.

Economics relies on competition to push companies to innovate. The role of the regulator should be to set and enforce safety standards. The concept of a regulator protecting drivers, for example, from low pay is no different than a regulator setting the price for real estate. If the price for a safe product gets too low to provide that product, people will stop selling it. The market will correct itself.

It is not the role of the regulator to stop that process. The regular’s job in a competitive market is only to ensure that as prices drop, safety does not.

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1The history of the trucking industry is such a fun example to read about. “a frozen dinner with a hamburger patty instead of a chicken leg requires trucking rates that are 20 to 25 percent higher”

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This post originally appeared at Zach Ware's Notebook.

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