Tradeoffs


Why government regulation stifles the free market
I saw a link to this article on Wren's Nest and I was fascinated by the replies there.

Even though the article specifically states that "costly new equipment" would be necessary, few seem willing to make the jump and realize that also means higher costs passed along to the consumers. My guess is that once the equipment is in place, the same people who are cheering the regulation now will be moaning about the higher prices then.

Like global warming, pollution is beginning to be sold as an absolute rather than a series of tradeoffs.

I suppose it was inevitable, but I don't approve.

We know that as we push closer to the theoretical edge, the costs get higher.

Let's say for example that to reduce pollution emissions of a given industrial plant by 80%, it's going to increase the cost by about 20%. Seems reasonable, doesn't it?

80% less pollution still leaves pollution. So let's require 90% reduction.

But that extra 10% reduction costs as much as the previous 80%, we've now added 40% to the costs.

90% less pollution isn't quite enough. Make it 95%. That in turn adds another 23% to the costs. The cost (passed along to the consumer) is now 63% more than it was.

Meanwhile, our competition from Thatcountry (which doesn't have pollution regulations) is producing the product for 63% less than we are (we'll assume that labor and other costs remain constant). The more they sell, the more pollution is sprayed into the environment. Our pollution regulations have now insured that imported products are cheaper than domestic products, even as their environmental costs are higher.

So did the governmental regulation to prevent pollution do any good?

The numbers and breakpoints may vary from situation to situation, but you get the idea. The closer you approach an "ideal," the higher the costs get.

Engineering is all about tradeoffs. You could build a factory that is 99% pollution free, but if the costs of the products produced are several times that of the competition, you won't sell anything.

People are looking for value, not necessarily the lowest cost. They might be willing to pay 20% more to reduce pollution by 80%, some might be willing to spend 40% more to reduce pollution by 90%, but almost no one would be willing to 63% more for 95% reduction. Eighty percent would be "good enough" for most people.

Government regulation not only imposes higher costs, but it displaces business to places that aren't as highly regulated.

— NeoWayland

Posted: Sat - March 18, 2006 at 05:35 PM  Tag


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