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March 14, 2017
Regulations Can Be Costly And Inefficient, But That Doesn't Mean We Should Scrap Them
Pro-business advocates call for broad-based deregulation. But such deregulation would harm the public, making it not free enterprise. It's important to identify distortionary regulations, like fuel-economy standards, to motivate the search for less distortionary approaches, like a gas tax.
By Steve Cicalavia Forbes
Government intervention in the economy is ubiquitous. Around the campus of the University of Chicago, we have what we call “Casey’s Conjecture,” that just about anything unusual in society can be explained by the tax code. Why is health insurance in the United States largely linked to your job? Because fringe benefits weren’t subject to wage controls during World War II, and subsequently not taxed as income. Why are wheels of Emmentaler cheese over 200 pounds? Because medieval Swiss authorities would levy taxes per wheel, rather than by weight. The list is long, and the lunch conversations are fun.
The energy sector is no exception, with costly consequences that shape the entire structure of the industry. As an example of the unintended consequences of poorly designed regulations, consider fuel-economy standards for passenger cars and light trucks. The economic rationale for such regulation is that emissions from gasoline cause pollution, so that consumers are imposing health costs on others when they make driving decisions. At first blush, requiring higher fuel economy is a way to reduce these costs.
However, such standards are often designed so that larger vehicles are subject to less stringent requirements—because it’s not cost-effective to hold large pickups and tiny smart cars to the same standard. Just as with Swiss cheese, this provides carmakers with a strategy to reduce the cost of compliance: add more weight. From their perspective, this makes sense if it’s cheaper to add weight than to build more efficient cars, and consumers value the lower price more than the lower fuel economy.
My colleagues Koichiro Ito and James Sallee recently provided a striking demonstration of how automakers respond to this type of attribute-based regulation by taking a look at the auto market in Japan. Several years ago, regulators there implemented a new system that created discrete and discontinuous standards for vehicles based on weight. The goal was to provide flexibility to manufacturers that produced larger vehicles...