Government Regulators are Monopolies

Monopolies provide poor quality at high cost. Everybody knows this. A monopolist does not have to keep improving the quality of the good or service it produces or keep its price down, because its customers have nowhere else to go. When a monopoly is a monopoly by law – and those are the only kinds of monopolies that last – customers have nowhere else to go because no other enterprise is legally permitted to offer the good or service in question.

Why do we let monopolies provide the service of assuring product quality and safety?The more important a good or service is to the public well-being, the more we should want it to be provided competitively, so competition can force providers to keep improving quality and containing cost.

So why do we let monopolies provide the service of assuring product quality and safety?

Among the most important services in society is assuring the quality and safety of goods and services. We want assurance, for example, that our taxi drivers are competent and their cars are safe, that our banks have adequate capital, that our medicines are safe and effective, and that our schools teach our children well.

And yet the government agencies that regulate the quality and safety of these are legal monopolies. Those they regulate are required to abide by the government agencies’ decisions; the regulated enterprises have no freedom to choose different quality-assurance services from some competing entity instead. Government regulatory agencies are thus not regulated by market forces and, accordingly, they are not directly accountable to the public they are supposed to serve. (See my previous piece in this series, “Government Regulators are Unregulated.”) They are indirectly accountable to the public through the political process, but that process puts so much distance between the public and the government regulator that regulators are effectively left unregulated.

So, government regulators are unregulated monopolies.

Consider some examples:

  • Taxicab service is regulated by public service commissions (PSCs). Taxicab and limousine companies may not decline to follow the standards set by the PSCs and sign on instead with alternative enterprises with different standards of quality and different methods of quality assurance; the PSCs face no competition as they impose their standards, be they sensible or silly, cost-effective or wasteful. The PSCs have a monopoly on the service of assuring the quality and safety of taxicabs and limousines.
  • Bank capital is regulated by a web of agencies including the Federal Reserve (“the Fed”) and the Federal Deposit Insurance Corporation (FDIC). Banks may not decline the attentions of the Fed and FDIC and instead choose to be inspected and certified as safe by, say, independent associations of banks that mutually guarantee one another’s deposits. Hence the Fed and FDIC face no competition as they impose their standards, whether those standards are good or bad, whether they stabilize or destabilize banking overall. The Fed and FDIC have a monopoly on the service of assuring the soundness of banks and the safety of depositors’ money.
  • Drugs are regulated by the Food and Drug Administration (FDA). Pharmaceutical companies may not choose some other entity, perhaps in the private sector, to test their products and certify their safety and effectiveness (at least for on-label use). The FDA faces no competition in setting these standards, even though the standards it imposes and the processes it mandates are excessively strict, time-consuming, and expensive. It has a monopoly on the service of assuring the quality and safety of drugs.
  • Government schools are regulated by boards of education and state departments of education. Government schools may not set their own standards for curriculum and teacher performance, nor embrace a different kind of curriculum, such as the Montessori approach. They may not choose to be accredited by some independent enterprise maintaining different standards. School boards face no competition in standard setting for government schools. School boards have a monopoly on the service of assuring the quality of K–12 government schooling.

To be clear, these regulatory agencies do not have monopolies in the strict sense that no other provider of quality assurance is allowed to operate. For example, some taxi companies may distinguish themselves by enforcing particularly high standards of cleanliness and punctuality; banks could join associations that certify their exceptionally large capital cushions; and name-brand drug manufacturers try to distinguish their products as better than generics. In all these cases, however, the government regulator is the only quality assurer to whose standards all the enterprises in the industry must by law conform. Additional requirements over and above what the government requires are allowed, but the government’s requirements are mandatory. In this sense government regulators have monopolies.

The legal monopoly status of government agencies leaves the public stuck with nowhere to turn.The legal monopoly status of government regulatory agencies is a problem. It means that when and if these agencies do a bad job of assuring quality in their industries, the public is stuck and they have nowhere to turn, so there are no systemic forces at work to improve the agencies’ performance or replace them with better quality-assurance providers. And, often, the government agencies do a very poor job indeed.

It need not be this way. The service of assuring quality and safety can be – in fact it has been and is, to the extent government interference allows – provided competitively through the free-market process, so that the enterprise of quality assurance itself is regulated by market forces. For example:

  • In the Internet age, non-“taxi” ride services such as Uber, Lyft, and others have managed to come into being outside the control of the PSCs. They have established their own standards of driver and car quality, and of systems for enforcing those standards. Their standards and systems are different from those set by the PSCs and, judging by public enthusiasm for the services, better. The quality and safety assurance methods used by Uber and Lyft would seem to make taxi regulation obsolete. Why should bureaucrats try to assure the safety and quality of taxis when competition among Uber, Lyft, and taxis would do the job better? Set taxis free of government regulation. With that freedom would come more accountability to the public, not less: with Uber and Lyft, and taxis if they were allowed, every rider is an inspector.
  • In banking free of government restrictions and mandates, different banks with different tolerance for risk and different ability to assess it would make different kinds of loans and hold different kinds of assets. Profit-and-loss feedback would tell banks and their clearinghouse associations or insurance pools which kinds of loans and asset profiles are riskier, calling for more capital to back them. (All banks would naturally join clearinghouse associations to reduce their cost of exchanging checks and notes, as they did historically. Today the Fed is the monopoly clearinghouse. Insurance pools would likely arise if the FDIC were to go away.) These standards, enforced by clearinghouse associations
    1, 2  - View Full Page