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Regulations, commons, and how to avoid tragedy.

March 12, 2013

Like many things in modern America, “regulations” have become a sort of litmus test for which of the two giant gangs that you belong to.  More regulation?  Democrat.  Deregulation (less regulation)?  Republican.  Reagan is famous for deregulating large swaths of private industry, greatly reducing the amount (and severity) of rules they had to follow, and Republican congresses have been highly vocal in fighting regulation pushed by Democrats.

However, this divide ignores the fact that “regulations” aren’t just a homogenous mass who volume should be either increased or decreased, depending on your political affiliation.  There are good regulations, bad regulations, and regulations that are of mixed effect (good for some groups and bad for others).  Most, in fact, are of mixed effect… although sometimes the group they benefit is very small and the group they hurt is very large.

Special Interest Regulation

These types of regulations are generally lobbied for by the small group that they will benefit and  ignored by the masses who will suffer under the terms of the new regulation.  The trick to this type of regulation is that there is a large benefit to the well-connected few while the amount of harm caused by the regulation to each individual outside the favored group is small enough that it barely crosses their radar.  Nonetheless, the total harm caused is greater than the total benefit.

One example, given in Jeff Speck’s wonderful book Walkable Cities, is that of the mysteriously wide Miami intersections.   Two narrow streets in residential neighborhoods will inevitably meet in an overly large block of asphalt.  This asphalt cost money to build, trapped heat, inhibited walkability, gobbled up real estate, and required even more money to maintain.  So why are they all constructed like this, when there is a large public cost and no clear public benefit?

The answer is that the firefighter’s union once struck a deal that no truck would ever be sent out with fewer than four firemen on it.  That’s good for safety and even better for job security, but the only truck that seated four was the hook and ladder.  So, for many years, one-story residential neighborhoods in Miami had to be designed around the lumbering turning radius of a truck built for tall-building fires.  —Jeff Speck

The firefighters benefitted greatly while the rest of the population suffered the minor collective expense of more taxes and decreased livability.  I choose this example both because it deals with my favorite subject of walkability and because it implicates a type of person we usually hold up as noble.  If firemen can come up with regulations this self-centered and wasteful, imagine what is being done by the less trustworthy and less heroic special interest groups in our communities.

Anti-competition Regulation

A subset of special-interest regulation is monopolistic regulation.  Imagine that company X and company Y are in competition to build ladders.  Company X has a patented system to provide “finer grained height control” by placing the rungs at the top of the ladder closer than those at the bottom.  Company Y makes ladders with rungs that are evenly spaced the whole way up, and is losing in the marketplace because users prefer company X’s patented “finer grained height control”.  For a relatively small cost, company Y can lobby for “safety” regulations that require ladders to have evenly spaced rungs, thus destroying company X’s advantage and nullifying the value of company X’s entire stock of ladders.

This is a made up example, but favorable regulation is an obvious method of gaining a market competitive advantage.   Based on the number of lobbyists in Washington, it is a method that is being fully taken advantage of.

Good regulation

Good regulation is that which preserves shared resources, protects the basic rights of citizens, and promotes honesty in commerce.  These are purposefully fuzzy categories which each merit (and have received) multiple books on the subject, but of particular interest in this case is that of protecting shared resources.

Regulation to protect shared resources, besides ensuring the health and continued wealth of each individual citizen, can be seen as an extension of both property rights and criminal justice.

Property Rights

If a resource is shared and someone degrades it, they are depriving you of the value of your portion of the shared resource and thus owes you recompense for the destruction of your property.

Criminal Justice

If I punch your child, I will rightfully go to jail.  However, if I contribute to pollution which causes your child to have asthma, it is the job of the regulators to either make me stop the harmful behavior or make me pay a cost proportionate to the harm caused to others (and then use that money to help the victims).  Money, of course, cannot make up for the tragedy of a perpetually ill child, but it at least sends a signal to the offending company and helps those affected to make up for their loss.

Tragedy of the commons

The tragedy of the commons, in the original example, concerns a public pasture on which cows can graze.  When a cow grazes on on the pasture, it reduces the level of the grass available and eventually degrades the quality of the land itself through overgrazing.  This reduces the quality of the grazing for every cowherd, including the one who owns the cows doing the destruction.  However, despite the damage being done to the pasture, there is no point before the complete destruction of the commons at which it is to the advantage of an individual cow-herd to stop using the “free” grass and start feeding his cows on his own land.    Thus all the cowherds put all their cows on this one common piece of land and it is (tragically) destroyed.

This is both the peril and promise of regulations.

The peril: Special interests groups create regulations that benefit themselves greatly but hurt everyone else either directly (anti-competition), indirectly through wasted resources (the Miami residential intersections), and indirectly through increasing the amount of red tape that everyone must cut through before starting a new venture.

The promise:  Our air, water, and land are textbook examples of the tragedy of the commons.  The actions taken by polluters result in decreased health and increased cost (filtration systems, medical bills, etc.) for everyone in the affected area, but it is never to the immediate advantage of the offenders to stop polluting.  However, smart regulation can put the cost of pollution on the polluters, making the market fair again and helping to preserve the shared resources that we all rely on.

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