How markets regulate themselves better than bureaucrats
© Greg Nash

One of President Trump's memorable campaign promises was to reduce the amount of regulation in the United States. Trump promised to eliminate two regulations for every new regulation enacted. While cutting red tape — i.e., ineffective but costly rules — is always a good idea, effective regulation is necessary in a vibrant and dynamic economy. Regulation can help provide high quality goods and services that people can trust.

It matters, however, who or what is doing the regulating. Contrary to popular belief, governments do not have a monopoly on the provision of regulation. In fact, both the government and market forces regulate goods and services, but one of them regulates better. And it isn't always the bureaucratic army employed by federal, state and local governments.

Consider the regulation of taxicabs and other ride-hailing services. In many cities, taxis are regulated by public service commissions (PSCs). Instead of allowing the popular new ride-hailing services Uber and Lyft to operate, and thereby giving the public the benefit of innovation and competition, some PSCs have imposed restrictions on the new organizations that protect established taxi businesses from competition. With these "regulations," some cities have even banned Uber and Lyft altogether, or have made it impossible for Uber and Lyft to operate.

Regulations in Austin, Texas, forced Uber to leave the city, creating a void in the ride-hailing industry. In yet another example of the "law of unintended consequences," this void led to the development of a black market where individuals could connect via Facebook or Craigslist to arrange ride-sharing services. These alternatives do not provide the same quality assurances as Uber, possibly making ride-hailing more risky rather than less.

By impeding the expansion of ride-hailing, government regulators are actually blocking the improvement of ride safety and quality.

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Government regulation often lacks mechanisms for effective oversight or even simple retrospective analysis to see if a rule actually works as intended. And as the case of Austin shows, some regulatory approaches can lead to the opposite of the regulations' ostensible goals.

 

Both politicians and the employees of regulatory agencies that make government regulations are susceptible to the influence of well-organized and concentrated interest groups, such as incumbent taxi companies and cabbie unions. But while voters at least have some ability hold politicians accountable for their actions, no such accountability applies to the hundreds of thousands of unelected bureaucrats filling the offices of Washington, D.C. and state capitals.

On the other hand, regulation by market forces does not share this problem. For example, Uber sets standards for various aspects of its ride-hailing business, such as the kinds and conditions of cars that may be used, the insurance coverage drivers must have, drivers' backgrounds and legal records, and the minimum average customer ratings that drivers must maintain. Uber's customers count on these standards. If they are not satisfied, customers can easily report the driver through the app. With Uber, every customer is an inspector.

Any company that wants to enter the ride-hailing industry and compete with Uber will need to meet or exceed the standards that customers value, such as the quality and safety standards enabled and enforced by Uber's rating system. For example, Lyft competes with Uber for quality and safety every day and in every market. If either company's quality or safety falls short of what the public wants, the other, or a third company, will fill in the void.

In other words, market forces provide an effective means of regulating.

Market regulation consistently outperforms government regulation because it responds to customers' wants as well as to changes in technology and business practices. Even though government regulators may intend for their rules to serve the public interest, sometimes they can only make an educated guess of how to regulate, because they have no competing standard-setters to learn from. Furthermore, this lack of competition means government regulations tend to be static and incapable of evolving and improving.

Market regulation is different because companies have competition and the profit motive. To maximize profit, a successful company will look to provide what the customer wants at an affordable price. Any money spent on unwanted "quality" will be a waste, while the failure to spend money on the kinds of quality customers do want will also negatively affect the bottom line.

Regulation by market forces — that is, by competition and profit maximization — tends to produce goods and services that both the customer and company are happy with.

All goods and services should be closely regulated for quality and safety. Such regulation should be well-designed, effective and adaptive. That's a task best met by market forces in free and robust competition, not by unelected and unaccountable government bureaucrats.

This piece was revised on March 13, 2017 at 11:45 p.m.

Patrick A. McLaughlin is a senior research fellow with the Mercatus Center at George Mason University. Howard Baetjer is a lecturer in the economics department at Towson University and blogs at FreeOurMarkets.com.


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