High Prices—Poor Product—Government Monopolies in Action

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    Do not think about, write about or deal with  human behavior without determining the effects of incentives. It’s not their money, of course they’ll waste it.

    Wherein we see various kinds of government regulations which produce less innovation, shoddy product and high prices–the government trifecta.

Government Regulators are Monopolies
Howard Baetjer, Jr.

Monopolies provide poor quality at high cost. Everybody knows this. A monopolist does not have to keep improving the quality of the good or service it produces or keep its price down, because its customers have nowhere else to go. When a monopoly is a monopoly by law – and those are the only kinds of monopolies that last – customers have nowhere else to go because no other enterprise is legally permitted to offer the good or service in question.

Why do we let monopolies provide the service of assuring product quality and safety?The more important a good or service is to the public well-being, the more we should want it to be provided competitively, so competition can force providers to keep improving quality and containing cost.

So why do we let monopolies provide the service of assuring product quality and safety?

Among the most important services in society is assuring the quality and safety of goods and services. We want assurance, for example, that our taxi drivers are competent and their cars are safe, that our banks have adequate capital, that our medicines are safe and effective, and that our schools teach our children well.

And yet the government agencies that regulate the quality and safety of these are legal monopolies. Those they regulate are required to abide by the government agencies’ decisions; the regulated enterprises have no freedom to choose different quality-assurance services from some competing entity instead. Government regulatory agencies are thus not regulated by market forces and, accordingly, they are not directly accountable to the public they are supposed to serve. (See my previous piece in this series, “Government Regulators are Unregulated.”) They are indirectly accountable to the public through the political process, but that process puts so much distance between the public and the government regulator that regulators are effectively left unregulated.

So, government regulators are unregulated monopolies.

Consider some examples:

    Taxicab service is regulated by public service commissions (PSCs). Taxicab and limousine companies may not decline to follow the standards set by the PSCs and sign on instead with alternative enterprises with different standards of quality and different methods of quality assurance; the PSCs face no competition as they impose their standards, be they sensible or silly, cost-effective or wasteful. The PSCs have a monopoly on the service of assuring the quality and safety of taxicabs and limousines.
    Bank capital is regulated by a web of agencies including the Federal Reserve (“the Fed”) and the Federal Deposit Insurance Corporation (FDIC). Banks may not decline the attentions of the Fed and FDIC and instead choose to be inspected and certified as safe by, say, independent associations of banks that mutually guarantee one another’s deposits. Hence the Fed and FDIC face no competition as they impose their standards, whether those standards are good or bad, whether they stabilize or destabilize banking overall. The Fed and FDIC have a monopoly on the service of assuring the soundness of banks and the safety of depositors’ money.
    Drugs are regulated by the Food and Drug Administration (FDA). Pharmaceutical companies may not choose some other entity, perhaps in the private sector, to test their products and certify their safety and effectiveness (at least for on-label use). The FDA faces no competition in setting these standards, even though the standards it imposes and the processes it mandates are excessively strict, time-consuming, and expensive. It has a monopoly on the service of assuring the quality and safety of drugs.
    Government schools are regulated by boards of education and state departments of education. Government schools may not set their own standards for curriculum and teacher performance, nor embrace a different kind of curriculum, such as the Montessori approach. They may not choose to be accredited by some independent enterprise maintaining different standards. School boards face no competition in standard setting for government schools. School boards have a monopoly on the service of assuring the quality of K–12 government schooling.

To be clear, these regulatory agencies do not have monopolies in the strict sense that no other provider of quality assurance is allowed to operate. For example, some taxi companies may distinguish themselves by enforcing particularly high standards of cleanliness and punctuality; banks could join associations that certify their exceptionally large capital cushions; and name-brand drug manufacturers try to distinguish their products as better than generics. In all these cases, however, the government regulator is the only quality assurer to whose standards all the enterprises in the industry must by law conform. Additional requirements over and above what the government requires are allowed, but the government’s requirements are mandatory. In this sense government regulators have monopolies.

The legal monopoly status of government agencies leaves the public stuck with nowhere to turn. The legal monopoly status of government regulatory agencies is a problem. It means that when and if these agencies do a bad job of assuring quality in their industries, the public is stuck and they have nowhere to turn, so there are no systemic forces at work to improve the agencies’ performance or replace them with better quality-assurance providers. And, often, the government agencies do a very poor job indeed.

It need not be this way. The service of assuring quality and safety can be – in fact it has been and is, to the extent government interference allows – provided competitively through the free-market process, so that the enterprise of quality assurance itself is regulated by market forces. For example:

    In the Internet age, non-“taxi” ride services such as Uber, Lyft, and others have managed to come into being outside the control of the PSCs. They have established their own standards of driver and car quality, and of systems for enforcing those standards. Their standards and systems are different from those set by the PSCs and, judging by public enthusiasm for the services, better. The quality and safety assurance methods used by Uber and Lyft would seem to make taxi regulation obsolete. Why should bureaucrats try to assure the safety and quality of taxis when competition among Uber, Lyft, and taxis would do the job better? Set taxis free of government regulation. With that freedom would come more accountability to the public, not less: with Uber and Lyft, and taxis if they were allowed, every rider is an inspector.

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     If, fifteen years ago, one had asked taxi boards, local governments and taxi operators, if unregulated ride-sharing services would be successful, they would have denied it. Now that ride-sharing is successful, they have no argument.

    In banking free of government restrictions and mandates, different banks with different tolerance for risk and different ability to assess it would make different kinds of loans and hold different kinds of assets. Profit-and-loss feedback would tell banks and their clearinghouse associations or insurance pools which kinds of loans and asset profiles are riskier, calling for more capital to back them. (All banks would naturally join clearinghouse associations to reduce their cost of exchanging checks and notes, as they did historically. Today the Fed is the monopoly clearinghouse. Insurance pools would likely arise if the FDIC were to go away.) These standards, enforced by clearinghouse associations or insurance pools as conditions of membership, would evolve with experience. Those whose standards were too strict would lose members to more liberal competitors, and those whose standards were too loose would lose members by attrition as weak or troubled banks were bought out by stronger ones. Those whose standards were near the sweet spot would thrive and be imitated.
    If doctors and hospitals were free to try new drugs according to their own judgment, new drugs would be regulated in the same way off-label uses of drugs are regulated now: that is, in the words of Dan Klein and Alex Tabarrok, “by the consent of patients and the diverse forms of certification made by physicians and medical institutions.” Different doctors and hospitals, and their insurance companies, would set different standards for what kinds of drugs might be used for different maladies, based on continuing research into their safety and effectiveness. Doctors, hospitals, pharmaceutical companies, and insurance companies would both compete and cooperate with one another in a process of discovering what standards of drug safety and procedures for assuring it work best.
    Schooling could be regulated by market forces even if governments continued to pay for it through a voucher system or some other mechanism for letting parents, rather than school boards, decide which schools receive their children’s schooling dollars. In such a system parents unsatisfied with one school could put their children in another, better regulated school. Schools could choose to adhere to different quality standards set by different schooling companies or associations, such as today’s charter school enterprises KIPP (Knowledge Is Power Program), Uncommon Schools, and Green Dot schools, or the Montessori or other approaches. Parents’ choices and those of schooling enterprises learning from the successes of one another would shape the evolving quality standards schools would have to meet to stay in business.

Regulation of quality and safety is an essential service in any healthy economy. It is too important to be handled by unregulated government monopolies. We should replace government regulation with regulation by market forces.

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    Those who believe that only government regulation is “real” regulation obviously don’t know about markets regulating themselves.

Government Job or Respect–Which’ll It Be?
Cheerio and ttfn,
Grant Coulson, Ph.D.
Author, “Power Teaching: How to Find Someone to Teach Your Child when the Education System has Failed.
Cui Bono–Cherchez les Contingencies

 

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