the problematic incentives of government regulation presentation by prof. howard baetjer econ 640,...
TRANSCRIPT
The Problematic Incentives of Government Regulation
Presentation by Prof. Howard Baetjer
Econ 640, April 21, 2009
Incentives in government regulation
• Kirzner assumes that regulators are well-intended—that they want what is best for the general public.
• Here we relax that assumption. (See Kirzner p. 445)
Contrast the incentives
Unhampered market
• Private ownership
• Freedom of contract
• Regulation by market discipline
Government intervention
• Common ownership
• Restriction of freedom to contract
• Regulation by bureaucrats
Hairdresser licensing
• What is its avowed purpose?
• How does it work -- what are the institutions?
• What groups are most affected by it?
• Sharissa’s story
• What are the incentives for licensed hairdressers under this institution?
Hairdresser licensing
• What appears to be the actual purpose of hairdresser licensing?
• Some detail on Maryland’s licensing law
• The capture theory of regulation
• Legal institutions
• Informal institutions
• Market (for profit) institutions
Are there civil society alternatives
to hairdresser licensing?
• Legal institutions – tort liability
• Informal institutions – reputation – word of mouth
• “Time wounds all heels”
• Market institutions– intermediaries that
provide information• salons• beauty schools
(certification)
– information vendors • like Consumer Reports
– insurance companies
Civil society alternatives to hairdresser licensing
• Legal institutions
• Informal institutions• Market institutions
Are there civil society alternatives to pharmaceutical regulation?
• Legal institutions – tort liability
• Informal institutions – reputation
• for all parties • (connected directly to
stock price)
– word of mouth • “Time wounds all
heels”
• Market institutions– intermediaries that
provide information• hospitals • pharmacists• doctors
– information vendors • e.g. Consumer Reports• Underwriters’ Laboratory
equivalent
– insurance companies• for intermediaries• for drug companies
Civil society alternatives to pharmaceutical regulation
Examples of Type II errors by FDA Drug or device
Length of approval delay
Estimated consequences
Thrombolytic therapydissolves blood clotsInterleukin-2*treats kidney cancer
Misoprotolprevents bleeding ulcersAmbuCardioPump**Emergency room CPR device
Home HIV test
* Already available in Europe** Available in most industrialized nations
Examples of Type II errors by FDA Drug or device
Length of approval delay
Estimated consequences
Thrombolytic therapydissolves blood clots
2 years
Interleukin-2*treats kidney cancer
Misoprotolprevents bleeding ulcersAmbuCardioPump**Emergency room CPR device
Home HIV test
* Already available in Europe** Available in most industrialized nations
Examples of Type II errors by FDA Drug or device
Length of approval delay
Estimated consequences
Thrombolytic therapydissolves blood clots
2 years up to 22,000 deaths
Interleukin-2*treats kidney cancer
Misoprotolprevents bleeding ulcersAmbuCardioPump**Emergency room CPR device
Home HIV test
* Already available in Europe** Available in most industrialized nations
Examples of Type II errors by FDA Drug or device
Length of approval delay
Estimated consequences
Thrombolytic therapydissolves blood clots
2 years up to 22,000 deaths
Interleukin-2*treats kidney cancer
Nov. 1988 – May 1992
Misoprotolprevents bleeding ulcersAmbuCardioPump**Emergency room CPR device
Home HIV test
* Already available in Europe** Available in most industrialized nations
Examples of Type II errors by FDA Drug or device
Length of approval delay
Estimated consequences
Thrombolytic therapydissolves blood clots
2 years up to 22,000 deaths
Interleukin-2*treats kidney cancer
Nov. 1988 – May 1992
3500 deaths
Misoprotolprevents bleeding ulcersAmbuCardioPump**Emergency room CPR device
Home HIV test
* Already available in Europe** Available in most industrialized nations
Examples of Type II errors by FDA Drug or device
Length of approval delay
Estimated consequences
Thrombolytic therapydissolves blood clots
2 years up to 22,000 deaths
Interleukin-2*treats kidney cancer
Nov. 1988 – May 1992
3500 deaths
Misoprotolprevents bleeding ulcers
9 ½ months
AmbuCardioPump**Emergency room CPR device
Home HIV test
* Already available in Europe** Available in most industrialized nations
Examples of Type II errors by FDA Drug or device
Length of approval delay
Estimated consequences
Thrombolytic therapydissolves blood clots
2 years up to 22,000 deaths
Interleukin-2*treats kidney cancer
Nov. 1988 – May 1992
3500 deaths
Misoprotolprevents bleeding ulcers
9 ½ months 8000 – 15000 deaths
AmbuCardioPump**Emergency room CPR device
Home HIV test
* Already available in Europe** Available in most industrialized nations
Examples of Type II errors by FDA Drug or device
Length of approval delay
Estimated consequences
Thrombolytic therapydissolves blood clots
2 years up to 22,000 deaths
Interleukin-2*treats kidney cancer
Nov. 1988 – May 1992
3500 deaths
Misoprotolprevents bleeding ulcers
9 ½ months 8000 – 15000 deaths
AmbuCardioPump**Emergency room CPR device
not approved
Home HIV test
* Already available in Europe** Available in most industrialized nations
Examples of Type II errors by FDA Drug or device
Length of approval delay
Estimated consequences
Thrombolytic therapydissolves blood clots
2 years up to 22,000 deaths
Interleukin-2*treats kidney cancer
Nov. 1988 – May 1992
3500 deaths
Misoprotolprevents bleeding ulcers
9 ½ months 8000 – 15000 deaths
AmbuCardioPump**Emergency room CPR device
not approved7000 deaths
annually
Home HIV test
* Already available in Europe** Available in most industrialized nations
Examples of Type II errors by FDA Drug or device
Length of approval delay
Estimated consequences
Thrombolytic therapydissolves blood clots
2 years up to 22,000 deaths
Interleukin-2*treats kidney cancer
Nov. 1988 – May 1992
3500 deaths
Misoprotolprevents bleeding ulcers
9 ½ months 8000 – 15000 deaths
AmbuCardioPump**Emergency room CPR device
not approved7000 deaths
annually
Home HIV test 5 years
* Already available in Europe** Available in most industrialized nations
Examples of Type II errors by FDA Drug or device
Length of approval delay
Estimated consequences
Thrombolytic therapydissolves blood clots
2 years up to 22,000 deaths
Interleukin-2*treats kidney cancer
Nov. 1988 – May 1992
3500 deaths
Misoprotolprevents bleeding ulcers
9 ½ months 8000 – 15000 deaths
AmbuCardioPump**Emergency room CPR device
not approved7000 deaths
annually
Home HIV test 5 years 10,000 infections
* Already available in Europe** Available in most industrialized nations
Fifty years ago, one in 20 Americans needed a government license to work in their occupation. Today that number is close to one in three. In 1981, there were roughly 80 occupations that required a license in at least one state. Today there are 1,100.
Source: Institute for Justice:http://www.ij.org/index.php?option=com_content&task=view&id=2668
More examples of the “capture” of regulation by the regulated group
Bootleggers and Baptistshttp://www.perc.org/files/bootleggers.pdf
Texas Interior Designhttp://www.ij.org/index.php?option=com_content&task=view&id=1239&Itemid=165
Maryland Horse massagehttp://www.ij.org/index.php?option=com_content&task=view&id=2203&Itemid=165
Minneapolis taxishttp://www.ij.org/index.php?option=com_content&task=view&id=664&Itemid=165
Campaign finance lawhttp://www.youtube.com/watch?v=8Pu6cT6ICQQ
Minimum wage lawsThe USA and the RSA compared
The special-interest effect:Concentration of Benefits and Diffusion of Costs
Special interest group members
Enjoy concentrated benefits
--individually large benefits--
Each has a strong incentive to
keep informed,
organize, lobby,
spend a lot,
for the policy.
Taxpayers/consumers
Bear diffused costs
--individually small costs—
Each has a weak incentive to oppose the policy
“Rational voter ignorance”
So whose voices do the politicians hear?