Friday, September 22, 2006

A Good Point

Over at EconLog, Bryan Caplan makes an interesting obervation:

"Contrary to popular belief, Big Business often supports federal regulation. Economists' standard explanation: Regulation either directly restricts competition, or indirectly imposes a greater burden on smaller businesses. But there is another important reason why Big Business supports federal regulation that economists often overlook: To avoid the enormous transactions costs of dealing with 50 different sets of state regulation, and thousands of different sets of local regulation."

This poses a problem for my proposal for libertarians to support federalism. Because increased federalism would likely create a large set of differing regulations, this could impose greater costs on businesses than the more uniform federal regulation, however burdonsome the latter may be.

A plausible responce is that competition among states to attract business will result in more liberal regulation, as most companies can easily leave a state if the regulations are overly burdonsome.


Katie said...

And why is that a necessary thing for this world? (Encouraging economic trade to move to wherever the governments don't ask them to internalize social costs into their own costs)

Long-term, what is that going to settle down into?

Nico said...

Thanks for pointing that out. My take is that federal regulations impose far greater social costs than they successfully internalize. This is clearly an empirical matter, so you have no reason to take my word for it, but there is pretty extensive research on the effects of regulation, such as the work of Sam Peltzman on driver safety regulation and the FDA. I'm certainly open minded on this, but I suspect that social costs are much more likely to be internalized in a free market.