Over the past few decades, economists have turned their attention to bureaucracy and regulation. By applying standard economic tools to these subjects, some valuable insights emerge. This article will focus on regulation economics with a specific example.
Economic Analysis of Regulation
Regulation of an economic activity puts constraints on the activity. This creates a market imperfection, meaning above-normal profits are available. Entrepreneurs will try to find ways to earn those economic profits, often by “inventing around” the regulations. This often leads to even more regulations, and so on. One of the results is an ever-expanding group of bureaucrats who write and enforce the regulations.
A Local Example
First Lady Michelle Obama has heavily promoted healthier school lunches. This is the first regulation. Many schools (including our local high school) have signed up for this program. The school cafeteria now sells food that many students do not want to eat. Aha! An entrepreneurial opportunity.
In this case the entrepreneurs are food trucks. These folks park on the street behind the high school (actually right next to the tennis courts). Students flock to them to pay for food they actually want to eat. This creates negative externalities for those living on the street: congestion and litter.
A neighboring town has attacked this problem by banning the food trucks from parking near schools. In other words, there is a new regulation. The city manager of that town is lobbying our city council to adopt a similar regulation. Currently the thinking seems to favor requiring the food trucks to bring trash bins and clean up the area before they leave. That alleviates the litter externality, but not the congestion.
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If the city council bans food trucks, the language of the regulation will need to be carefully written. What about ice cream trucks? What about pizza delivery? In fact, if the regulation is put in place, I look forward to a local entrepreneur offering to be the delivery intermediary between food trucks, local restaurants, and so on. Will the council then ban food deliveries to campus? Good luck with that.