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YOU DECIDE: When is regulation right?

July 10, 2009

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu


Dr. Mike Walden
Media representatives:For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

As a university professor, I come in contact with many foreign graduate students. Periodically I enjoy chatting with them about their impressions of our country and how those impressions might change the longer they're here. Although attitudes and ideas certainly vary, there is one consistent comment the students tell me. They are impressed with the amount of economic freedom we Americans have.

This freedom is seen on both sides of the economic exchange. For the most part, consumers have the freedom to buy what they want, to pursue the education and occupation they desire and to save and invest money according to their own plans and goals. Similarly, sellers - for the most part - have the freedom to develop products and services they think consumers want and to sell those products.

Notice, however, that I qualified my statements with the phrase "for the most part." This is because, while consumers and sellers in our country have a tremendous amount of freedom, they don't have complete control over all their decisions. We don't live in an economic free for all; there are some limits put on our buying and selling. These limits are usually imposed by government regulation.

We've seen two good examples of economic regulation recently. One is a new law passed in North Carolina restricting where people can smoke. The other is a proposed set of national laws that would put new controls on lenders and financial services firms.

I won't debate the pros and cons of these two examples. Instead, let me try to put the idea of economic regulation in context so you can decide which limits on our actions make sense and which don't.

There are three possible reasons for government regulation over economic decisions. One is if the decision-maker is not capable of making informed decisions in his or her best interest. This reason is most frequently given for children. The argument is that children can't make all their own decisions because they haven't yet been fully educated, and their abilities to reason and make judgments haven't been fully developed.

So we have many laws limiting or prohibiting what products can be sold to children. Such laws are largely non-controversial. One practical question is where to draw the line between a child and an adult - age 16, 18 or 21? But an increasingly controversial extension of this idea is whether it should be applied at the other end of the age spectrum, as, for example, in restricting elderly folks' ability to drive. Since I'm approaching that category, I'll be keeping my eye on this debate.

Another reason given for having government intrude on our economic decisions is when one person's choice has an adverse impact on someone else. This is the argument given for the new smoking bans in restaurants. It's argued those not wanting to smoke could be harmed by the second-hand smoke from those wanting to light up.

However, an alternative to regulation in this instance is to have people voluntarily divide themselves so as to avoid any potential harm. In the case of restaurant smoking, this would mean smoking and non-smoking sections or even smoking restaurants and non-smoking restaurants. Supporters of this approach say it solves the problem while preserving freedom of choice. Opponents say it's not always practical or doesn't always work, as in the case of smoking in an airplane.

Perhaps the most debated reason for regulation is the third case: asymmetric information. In plain English, this means the decision-makers - the buyer and the seller - can never be equal in terms of the information they have to make a choice. One party - usually the seller - has much more information than the other, and so has the upper hand. Therefore, it's the job of the government, through regulation, to level the playing field.

We often see these kinds of regulations in two areas: health care and personal finances. This is because most people, no matter how well educated, will never be able to successfully evaluate pharmaceutical products and complicated financial contracts. Through required clinical trials, in the case of pharmaceuticals, and necessary disclosures for financial products, the regulations do part of the job of protecting the consumer.

Not everyone is on board with this kind of regulation. Critics ask if the regulations could prevent some useful products from ever reaching the market, with consumers losing the potentially big benefits of these products. They worry that regulation may stifle innovation. They also ask if regulation could be replaced by private seals of approval or rating services, which consumers could access in their decision-making.

Most of us don't like to be told "no," particularly when it's the government doing the telling. Yet we recognize that in some circumstances, "no" is the correct response, even if it goes against our natural instinct. Determining when it is proper for the government to be given the authority to put up "go" and "stop" signs to our individual decisions is an issue we should not take lightly. It's one of the most important questions we must decide.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/

Posted by Dave at July 10, 2009 08:49 AM