Tuesday, 12 May 2009

An example of good regulation?

In a comment on the post Offsetting Behaviour , matt b wrote
Seriously, when was the last time you saw solid evidence (e.g. an empirical academic study) of a government program having anything like its intended effect? Governments, it seems, simply cannot do much right.
This reminded me of the follow exchange from an interview of Ronald Coase by Thomas W. Hazlett, contributing editor of Reason magazine, which first appeared in the January 1997 issue of Reason.
Reason: Can you give us an example of what you consider to be a good regulation and then an example of what you consider to be a not-so-good regulation?

Coase: This is a very interesting question because one can't give an answer to it. When I was editor of The Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies--perhaps all the studies--suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been. I was not willing to accept the view that all regulation was bound to produce these results. Therefore, what was my explanation for the results we had? I argued that the most probable explanation was that the government now operates on such a massive scale that it had reached the stage of what economists call negative marginal returns. Anything additional it does, it messes up. But that doesn't mean that if we reduce the size of government considerably, we wouldn't find then that there were some activities it did well. Until we reduce the size of government, we won't know what they are.

Reason: What's an example of bad regulation?

Coase: I can't remember one that's good. Regulation of transport, regulation of agriculture-- agriculture is a, zoning is z. You know, you go from a to z, they are all bad. There were so many studies, and the result was quite universal: The effects were bad.

5 comments:

Stephen Monrad said...

What about the regulation that traffic must drive on the right hand side of the road? That one seems to be good to me.

Paul Walker said...

If its so good why do many countries drive on the left?

Brad Taylor said...

Heh. Driving on one side of the road nicely demonstrates that most regulations are either destructive or useless. Having a law mandating which side of the road to drive isn't very harmful, nor very useful. Driving on one side of the road is a self-enforcing agreement. I'm not aware of any country which didn't have a de facto rule before government mandated it...

matt b said...

I think Stephen makes a good point. There is a distinction between regulations that create freedom and those that fight it.

I'm not sure what the distinction is, but I suspect it might be something like: rules that are required to let markets operate (e.g. by defining and protecting property rights, by reinforcing solutions to co-ordination problems like which side of the road to drive on) vs rules designed to override market outcomes.

Its these latter rules that are the problem and the home of unintended consequences, for a number of reasons.

Paul Walker said...

"I'm not sure what the distinction is, but I suspect it might be something like: rules that are required to let markets operate (e.g. by defining and protecting property rights, by reinforcing solutions to co-ordination problems like which side of the road to drive on) vs rules designed to override market outcomes."

Matt: I think you are right there are regulations that help the market operate and those that don't. My question would be, Do we really need the government to set up the rules that make the market operate? Can the market not design these rules for itself?