Transcript The Problematic Incentives of Government Regulation: Examples

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 wellintended—that they want what is best for
the general public.
• Here we relax that assumption. (See
Kirzner p. 445)
Contrast the incentives
Unhampered market
Government intervention
• Private ownership
• Common ownership
• Freedom of contract
• Restriction of freedom
to contract
• Regulation by market
discipline
• 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
Are there civil society alternatives
to hairdresser licensing?
• Legal institutions
• Informal institutions
• Market (for profit) institutions
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
Are there civil society alternatives
to pharmaceutical regulation?
• Legal institutions
• Informal institutions
• Market institutions
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
Examples of Type II errors by FDA
Drug or device
Length of
approval delay
Thrombolytic therapy
dissolves blood clots
Interleukin-2*
treats kidney cancer
Misoprotol
prevents bleeding ulcers
AmbuCardioPump**
Emergency room CPR
device
Home HIV test
* Already available in Europe
** Available in most industrialized nations
Estimated
consequences
Examples of Type II errors by FDA
Drug or device
Thrombolytic therapy
dissolves blood clots
Interleukin-2*
treats kidney cancer
Length of
approval delay
2 years
Misoprotol
prevents bleeding ulcers
AmbuCardioPump**
Emergency room CPR
device
Home HIV test
* Already available in Europe
** Available in most industrialized nations
Estimated
consequences
Examples of Type II errors by FDA
Drug or device
Thrombolytic therapy
dissolves blood clots
Interleukin-2*
treats kidney cancer
Length of
approval delay
Estimated
consequences
2 years
up to 22,000 deaths
Misoprotol
prevents bleeding ulcers
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
Thrombolytic therapy
dissolves blood clots
Interleukin-2*
treats kidney cancer
Length of
approval delay
Estimated
consequences
2 years
up to 22,000 deaths
Nov. 1988 –
May 1992
Misoprotol
prevents bleeding ulcers
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
Thrombolytic therapy
dissolves blood clots
Interleukin-2*
treats kidney cancer
Length of
approval delay
Estimated
consequences
2 years
up to 22,000 deaths
Nov. 1988 –
May 1992
3500 deaths
Misoprotol
prevents bleeding ulcers
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
Thrombolytic therapy
dissolves blood clots
Interleukin-2*
treats kidney cancer
Misoprotol
prevents bleeding ulcers
AmbuCardioPump**
Emergency room CPR
device
Length of
approval delay
Estimated
consequences
2 years
up to 22,000 deaths
Nov. 1988 –
May 1992
3500 deaths
9 ½ months
Home HIV test
* Already available in Europe
** Available in most industrialized nations
Examples of Type II errors by FDA
Drug or device
Thrombolytic therapy
dissolves blood clots
Interleukin-2*
treats kidney cancer
Misoprotol
prevents bleeding ulcers
AmbuCardioPump**
Emergency room CPR
device
Length of
approval delay
Estimated
consequences
2 years
up to 22,000 deaths
Nov. 1988 –
May 1992
3500 deaths
9 ½ months
8000 – 15000 deaths
Home HIV test
* Already available in Europe
** Available in most industrialized nations
Examples of Type II errors by FDA
Drug or device
Thrombolytic therapy
dissolves blood clots
Interleukin-2*
treats kidney cancer
Misoprotol
prevents bleeding ulcers
AmbuCardioPump**
Emergency room CPR
device
Length of
approval delay
Estimated
consequences
2 years
up to 22,000 deaths
Nov. 1988 –
May 1992
3500 deaths
9 ½ months
8000 – 15000 deaths
not approved
Home HIV test
* Already available in Europe
** Available in most industrialized nations
Examples of Type II errors by FDA
Drug or device
Thrombolytic therapy
dissolves blood clots
Interleukin-2*
treats kidney cancer
Misoprotol
prevents bleeding ulcers
AmbuCardioPump**
Emergency room CPR
device
Length of
approval delay
Estimated
consequences
2 years
up to 22,000 deaths
Nov. 1988 –
May 1992
3500 deaths
9 ½ months
8000 – 15000 deaths
not approved
7000 deaths
annually
Home HIV test
* Already available in Europe
** Available in most industrialized nations
Examples of Type II errors by FDA
Drug or device
Thrombolytic therapy
dissolves blood clots
Interleukin-2*
treats kidney cancer
Misoprotol
prevents bleeding ulcers
AmbuCardioPump**
Emergency room CPR
device
Home HIV test
Length of
approval delay
Estimated
consequences
2 years
up to 22,000 deaths
Nov. 1988 –
May 1992
3500 deaths
9 ½ months
8000 – 15000 deaths
not approved
7000 deaths
annually
5 years
* Already available in Europe
** Available in most industrialized nations
Examples of Type II errors by FDA
Drug or device
Thrombolytic therapy
dissolves blood clots
Interleukin-2*
treats kidney cancer
Misoprotol
prevents bleeding ulcers
AmbuCardioPump**
Emergency room CPR
device
Home HIV test
Length of
approval delay
Estimated
consequences
2 years
up to 22,000 deaths
Nov. 1988 –
May 1992
3500 deaths
9 ½ months
8000 – 15000 deaths
not approved
7000 deaths
annually
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 Baptists
http://www.perc.org/files/bootleggers.pdf
Texas Interior Design
http://www.ij.org/index.php?option=com_content&task=view&id=1239&Itemid=
165
Maryland Horse massage
http://www.ij.org/index.php?option=com_content&task=view&id=2203&Itemid=
165
Minneapolis taxis
http://www.ij.org/index.php?option=com_content&task=view&id=664&Itemid=1
65
Campaign finance law
http://www.youtube.com/watch?v=8Pu6cT6ICQQ
Minimum wage laws
The 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?