The Real Cost of Industry Regulations

In class, we discussed how industries actually benefit from government regulations, because the regulations can serves as barriers to entry, allowing firms to charge a higher price and obtain a larger profit.  We also looked at two common examples of regulated industries, sugar and corn.  

In the article, “Cattle Now Being Fed Cookies and Candies Instead of Real Food,” Anthony Gucciardi shows real effects that market regulations can have on society.  Gucciardi states that “livestock corporations have now begun feeding their cattle super cheap processed foods like cookies, gummy worms, chocolate, fruit loops and a whole list of candies.”

As we discussed in class, sugar prices in the US are twice as much as the world sugar price, due to regulations in the sugar market such as import tariffs, buy-back programs, and many other regulations.  However, even more recently, the corn market is becoming more and more regulated, driving up the price of corn as well.  In addition, there has been increased use of Genetically Modified Organisms (GMOs) or “fake corn” in order to lower the cost of corn production.  Even after studies have shown that consumption of GMOs actually kills livestock, 88% of the corn produced in the United States is a GMO.  However, since the corn market is regulated, firms in the corn industry are able to produce fake corn at a very cheap price, and sell it at a high price.  Many farmers are no longer able to afford to feed their cattle using (fake) corn at this highly regulated price, and therefore have an incentive to turn to other feeding means, including a diet of candy and sugar.  Even with the regulated sugar industry, the cost of using corn for feed is still greater than the cost of using sugar.  By consuming meat that was fed on a diet of not only GMOs but sugar and candy, humans will have to deal with the consequences and deterioration of our health. 

In conclusion, when the government is deciding on industry regulations, they should take the welfare of society into consideration, not just a single industry that is lobbying for the economic rent.  As Gucciardi states “many such individuals are purely looking to increase profits, utilizing ‘anything’ that keeps costs down regardless of the price.”  

Selective Benefits

On my way to class I stopped at Dunkin Donuts for my usual morning cup of coffee and I noticed a new sign by the register. It said "AARP DDiscount". After seeing that I was curious to see what other benefits AARP offers to their members to entice more people to sign up and eliminate any kind of Free Rider Problem they may face. On there website they have an entire list of discounts that are given to members.I was surprised to see the wide variety of selective benefits that are given by AARP. Some of them made me wish I was able to join the group. Based on Olson's reasons for successful groups and what we covered in class, such as finding ways to get people to join to stop the Free Rider Problem and keeping the group from being latent, AARP has become the powerful special interest group it is today.

Burning White Gold

The burning of ivory is intended to be a signal to poachers that the slaughter of endangered elephants must stop. In this photograph, "Some five tons of African ivory seized from Singapore is destroyed to keep it from further trade." However, for those who don't get caught, the destruction only drives up prices. When a single kill pays three times your country's per-capita income, seeing the competition in flames is hardly an incentive to enter a different line of work. Rather, it's flaming evidence that your supply curve is shifting up.

The poachers and traffickers who benefit thus don't even have to pick up the bill: the environmentally conscious spend a huge amount of money to enact government regulations that seem to protect the nature they love. Society could benefit from eliminating, or limiting the negative externalities of many harmful industries. However, Stigler's theory of regulation shows that regulation may not be the best tool for the job.

MA Dispensaries and Market Monopolies

A hotly contested Senate race is not the only question facing the citizens Massachusetts on November 6^th. Ballot Question 3 asks voters to approve a state law legalizing the medical use of marijuana: “A YES VOTE would enact the proposed law eliminating state criminal and civil penalties related to the medical use of marijuana, allowing patients meeting certain conditions to obtain marijuana produced and distributed by new state-regulated centers or, in specific hardship cases, to grow marijuana for their own use.” Setting aside the moral implications of medical marijuana use, if approved, Question 3 would create the first legal market for marijuana in modern Massachusetts history. The law “would allow for nonprofit medical marijuana treatment centers regulated by the state to grow and provide marijuana to patients or their caregivers. The number of treatment centers would be limited to 35 in the first year, but after that, more could be set up.”

The regulation of medical marijuana is most commonly discussed in moral, not economic terms, with political actors expressing concern over increased access and use and its potential to “corrupt the youth." This regulation scheme may appear at first glance to run counter to the interests of the firms. By limiting the number of authorized actors the state is significantly restraining the potential for market expansion and in turn potential profits. In reality, it is in the interests of licensed firms to limit the number of market actors and maintain their monopolistic price position. The proposed tight state control of this market serves as a significant barrier to entry for outside firms interested in opening dispensaries in MA. Stigler would attribute industry support for state regulation to this structure. In the current political climate state market intervention is often characterized as a burden on industry rather than a tool used by industry to limit competition. Firms have a vested interest in maintaining these protectionist regulations, while their limited impact to the average individual creates an incentive structure that dissuades individual political participation. The tight controls on medical marijuana being proposed in MA are defended on social grounds, but they designed to serve the interests of market actors not a concerned citizenry. 

The Wealth Industry

Many economists and market analysts believe the growing inequality in wealth in America played a major role in the recession. Before 2007, America was in the midst of the greatest wealth redistribution in history. Financial institutions preyed on poor Americans because the increase in business boosted their stock prices, which benefitted the wealthy American stock holders. Joseph Stiglitz attributes the original division in wealth to education and rent-seeking:

If you're born at the bottom of the income distribution, your likelihood of reaching the top isn't very high, largely because the odds of receiving a good education is tied to your parents' income. And a lot of the largest fortunes have to do with rent-seeking activities . . . “our legal framework [providing] scope for an increase in inequality."

Later in the article, Stiglitz states that a piece of the inequality solution is in creating regulation that discourages rent-seeking abilities. This sort of regulation will be nearly impossible to pass because creating that kind of legislation will require a large amount of lobbying in itself. While maybe a large percentage of America would indeed benefit from that kind of regulation, the group that can contribute the funds necessary would not benefit. The wealthy would instead put their funds towards lobbying for regulations that encourage rent-seeking because they want regulation that makes it harder for lower-class America to rise to the top 10 or 1%. In reality, the wealthiest Americans seek regulations where they can control how difficult it is to reach their level. 

Hurricane Sandy and the Election

In class we have determined that voters suffer a high ratio of marginal cost to benefit when voting. In this upcoming election, Hurricane Sandy could throw in extra costs that will dissuade more people from going to the polls.

We have learned from Buchanan that the costs of casting a vote are much higher than the benefits. Because voters have such a small chance of affecting the election results, the benefit they may get from one candidate winning is infinitesimally small (We can express this with the equation MB = |B1-B2|p where B1 and B2 are the expected benefits of either candidate winning, and p is the probability that the vote cast is the deciding vote, p can be in the ballpark of 1/100,000,000). On the other hand the costs are relatively high: the opportunity costs of not working or shifting time resources away from normal activities to voting, the costs of going to the polls (gas, etc.) and the costs of figuring out who to work for clearly trump the benefits of voting.

We also learned that those that do vote most often gain utility from "pulling the lever," the social stigma of not voting, civic duty, and irrational overestimation of the value of p in the above equation. For these people, the benefit does not come from the expected gains from one candidates' victory, but other exogenous factors. 

The article about the effects of Hurricane Sandy on voting concerns the voters who have the benefits discussed above. It says their "priorities might still be dealing with the storm's aftermath rather than a trip to the polls." Analysts speculate that the added costs imposed on voters because of the effects of the storm will result in a new marginal cost that will be higher than their marginal benefit, thus driving down voter participation rates.

Splitting Hairs Over Regulation

In this January 2012 article about licenses for Indiana barbers, we observe a classic case of industry seeking regulation as a means of excluding potential competitors.  The Indiana state legislature, hoping to boost employment by removing noxious regulations, proposed the removal of the licensing requirement for barbers.  Unsurprisingly, the loudest objections have come from the cosmetology industry, which has argued that "safety and health issues may arise without regulation."

Although Stigler's analysis of licensing focused on obtaining regulation, the same principles hold true for protecting regulation.  The presence of a cohesive opposition to the removal of licensing will weaken, delay, or prevent the legislation.  Stigler notes that membership in licensed occupations is more stable, that licensed occupations are less employed by business enterprises, and that licensed occupants operate locally.  All of these are true of barbers, who are organized and protected by the Indiana Cosmetology and Barbering Association, generally employed by either themselves or small business owners, and provide their services locally.

Furthermore, the article includes an example of regulations favoring a complement industry: barber academies.  As the Indiana regulations require, a potential barber must complete 1500 hours of instruction in a barber school.  Sure enough, Greg Kenny, Sr., of Kenny's Academy of Barbering also spoke out in opposition to the removal of the regulation.  Although he noted that its removal would put him out of business, he emphasized the inherent risks of a de-regulated barber industry.  "You're using razors and sharp instruments.  With all the noise about health and safety, it's crazy that anybody could open a barber shop and disseminate diseases throughout the community."  Casting the issue in terms of public safety allows the barbering industry and its complements to go on excluding potential competitors from the market.  It seems that regulation lasts even longer than a bad haircut.

Health Insurance CEOs Love Obamacare

While many health insurance executives are good republicans who dislike parts of Obama's healthcare bill, they are not in favor of Romney repealing it.  The new law will require many young, healthy people to purchase healthcare, which will more than cover the costs of requiring health insurers to cover anyone who applies regardless of their health.

"A recent PricewaterhouseCoopers study estimated the new markets would be worth $50 billion to $60 billion in premiums in 2014, and as much as $230 billion annually within seven years."

This example illustrates Stigler's capture theory which we discussed in class.  The capture theory states that an industry actively seeks, designs, and operates regulation for its own benefit.  Health insurance companies are doing exactly this in regards to the new regulations.  While they may not openly say it, the insurance industry is doing whatever possible to keep Obama care because they have billions of dollars of revenue to gain from these regulations.  At the same time, the industry is lobbying to remove certain parts of the bill which does impose higher costs on them.

It is illegal not to drink milk.

In class last week, we discussed the theory of economic regulation according to Stigler. This theory is called the “Capture Theory” and it states that regulation is acquired, designed, and operated by an industry. This theory is often an explanation for seemingly pointless and notably weird laws. An industry will treat regulation as a resource and a rational firm will seek this resource.

An example of one of the aforementioned laws states: “It is illegal not to drink milk” in Utah. A student at BYU recognizes the Capture Theory playing a role in the dairy industry when he states,

“I think the dairy lobbyists have too strong of a foothold in the state of Utah.” 

This student helps to explain that this regulation was not created because of public interest, or because people do not behave rationally in politics, but rather due to Stigler’s capture theory of economic regulation.