Wednesday, February 6, 2013

Why innovation and regulation rarely mix well

More from another article about Uber, the smartphone app that dispatches taxis and radio cars:

So why are incumbent regulated industries fighting these developments? And why are the regulators who police them turning around instead to slap down the innovators before they’ve even had a chance to try new approaches to old businesses?

The short answer is that innovation and regulation simply don’t work together. Regulated industries—including strictly licensed services from lawyers and doctors, public utilities such as power and water companies, and government-provided services including roads, bridges, and the post office—operate outside market-based systems. Competition is prohibited, even criminalized. Since innovative technologies are a particularly ruthless kind of competitor, they are directly or indirectly banned.

But why do governments choose to displace the market in the first place? In exchange for rules that sharply limit if not ban industry disruptors, companies in regulated industries agree to a wide range of public interest concessions, including price controls, guaranteed access, pre-approval on changing or eliminating services or offering new services, and extensive licensing requirements, oversight, and continuing education. That, at least, is the theory of regulation.

Right. The theory.


  1. But why do governments choose to displace the market in the first place?

    Also because monied constituents--the regulatees--want that. And then it becomes self-perpetuating.

    There are two primary groups who want that kind of regulation. One is the regulatees, who appreciate the stable market and market share, as noted in OP. The other primary group is the bureaucrat regulators, who appreciate the stable job prospects for themselves.

    Eric Hines

  2. As the 'market' crumbles, there is an increase in regulation. Or rather, vice versa. More regulating doth make for a larger "criminal" class. People who barter, accept cash under the table to limit the tax bite on their home business...etc., ad eternitatem.

    Every time NYC increases its taxation on cigarettes, the Pakistanis running huge tractor trailer loads of cartons can be seen whizzing past on I-95.

    No one wants a market without boundaries and limits. But scare tactics about 'safety', etc., have led to the ruin of many small businesses. In Faquier County, one has to question the sanity and/or integrity of the crackdown on wineries by the county fathers who seem bent on driving out those folks.

    Meanwhile, I made the mistake of holding my breath while waiting for the governor of our Commonwealth to make good on his campaign promise to privatize liquor stores. His verbiage did have the effect of seeing the ABC make a profit, but that doesn't begin to address the loss in tax monies which privatizing would have brought in.



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