Why Regulations Rarely Fix Anything

The following was written by Sam Paul, a student at New Saint Andrews College. If you wish to write something for this website, click here.

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Senator Mary Landrieu, D-Louisiana, announced proposed legislation that would prohibit airlines from charging passengers for their first check-in luggage. The purpose is to prevent airlines from charging “unfair fees”, while encouraging them to ease up on the carry-on items (Fox News, 11/21/11).

This is ludicrous. The legislation simply force airlines to raise prices on their tickets in order to compensate for the lost revenue, and is also yet one more intrusion of government into the private market. Taking it one step further, however, the proposed bill reflects an underlying assumption that America has developed about government since FDR’s “New Deal”. They assume that Government is a corrective device.

That people want governmental correction is quite evident, considering recent government initiatives. 2009 saw the Cash for Clunkers program, designed to correct our overdependence on gas-guzzling rigs (New York Times, 7/20/09). 2009 also witnessed a tobacco tax hike from 39 cents a pack to $1.01 per pack, the largest federal tobacco tax hike in history (USA Today, 4/3/2009). The Federal Government has increasingly tried to influence the patterns and habits of its citizens, rather than allowing them the freedom to decide for themselves.

Obviously, the assumption is skewed. “This view is false. A democratic government is merely a method of social organization, a process through which individuals collectively make choices and carry out activities.” (Gwartney, Common Sense Economics)

Lab Test: Governments Don’t Ensure Beneficial Economics

In fact, government initiatives that rely on majority vote rarely work out for the benefit of everyone. Let’s use a 5-man economy to demonstrate.

Plan A

Say that the cost of a project is $60, and it generates only $50 worth of benefit. Since the costs exceed the benefits, the project is clearly unproductive and should be rejected.

But, if the costs are equally allocated among the 5 voters, for $12 each, and are decided by majority vote, the project will be undertaken. 3 of the 5 voters would receive $15 in benefits, as opposed to the 2 remaining voters who would receive $3 and $2 in benefits. The costs imposed on the 2 voters would be substantially greater than their benefits, but since they are in the minority, they can’t do anything about it.

Plan B

In this alternative, the costs will be allocated according to the benefits received by each voter. Now, voters who receive a larger share of the benefits are required to pay a larger share of the cost. Now, the 3 voters will receive 30 percent of the benefits ($15 of the $50 total), but they will be required to pay 30 percent of the taxes to support the project. The 2 remaining voters would be required to pay only 6 and 4 percent of the cost, because this represents their share of the total benefits.

With that system in place, all five voters will vote “no” on the project because their share of the cost will exceed their benefits.

This illustrates an extremely important point: When voters pay in proportion to the benefits received, all voters will lose if the government action is unproductive, and all will gain if it is productive. (Gwartney, Common Sense Economics)

Consequences

With the illustration in mind, it’s obvious to see why these government initiatives have negative impacts overall.

Cash for Clunkers program only increased the demand and cost of other used cars, since a portion of the supply had been intentionally destroyed. Though it benefited the citizens who utilized the program and car dealerships, it had a negative impact on the remaining population who had to pay for the program itself through tax dollars and also for their more expensive used cars. (Miller, Sound Politics, 6/13/11)

The same impact would result from the airline legislation. Though certain passengers would save from not having to pay for their checked-in luggage, the cost for airline tickets would rise overall.

Government isn’t meant to be a corrective device. The sooner American voters realize this, the sooner we’ll be able to elect like-minded officials.

Copyright Capitalism Institute, 2011-present.