Wednesday, July 31, 2013

What if the government is wrong?

What if the government is wrong? Governments try to control many aspects of our lives from regulating the goods and services we buy to setting price controls. But what if the government is wrong.

In setting a minimum wage, supporter claim that employers are under paying their workers and should be forced to pay a higher wage. So the government set a minimum wage. But what if that wage is too high? An employer who over pays get a profit and loss signal if they over pay incentivizing them to lower the wage. What incentive does the government have to ensure the minimum wage is not set too high?

In regulating drugs, the FDA has to set an acceptable level of risk. What if they set this level too low? Life saving drugs may be denied to people who need them. In a free market, people set their own level of risk. Third party safety groups can review and assess the risk but they cannot prohibit someone from taking the drug because of a low risk threshold.

What about other regulations? What if government tells businesses to behave in ways that are not in the people's interest? If businesses try to act in a way counter to the interests of their customers they lose business. In this way the profit and loss mechanism insures businesses behave appropriately. But if government tells all businesses to perform certain tasks that do not maximize the customer's value, government has no incentive to change its demands. Since resources have to be reallocated to pleasing the government, these resources are no longer available for increasing consumer value.

Markets provide incentives for businesses to meet the customer needs. However, government gets no signals when trying to redirect resources away from the consumer's ends to its ends. In this way, government controls will always tend to reduce consumer welfare.

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