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Free Enterprise

Who Benefits from a Heavily Regulated Economy?


There are regulations that make sense. I'm grateful for laws that don't allow children's toys containing lead in the market. That's a good call. I'm less grateful for laws that shut down the lemonade stands of entrepreneurial children. I'm concerned by regulatory authorities like the Consumer Financial Protection Buruea that works behind closed doors and outside of Congressional oversight. Such laws and powers are instituted, at least rhetorically, for the sake of the everyday consumer--but not necessarily to his benefit.

James Surowiecki writes in The New Yorker about the regulation of the automobile industry that prohibits or restricts car manufacturers from selling their product directly to consumers. Tesla is shaking up an industry standard in operating without middlemen car dealers, and the dealers aren't happy. In some states, they've lobbied their governments to ban Tesla from selling their cars directly in order to protect the dealers' profitable--and unnecessary--position in the industry.

Writes Surowiecki:

Of course, no one involved presents it like this. State legislators insist that the status quo benefits consumers: the relevant Florida statute claims to be "providing consumer protection and fair trade." We're told that only independent dealers can guarantee service and warranty coverage. But look at the Apple Store: manufacturer-owned, and yet famous for the customer service and tech support provided at the Genius Bar. And while the argument is sometimes made that the use of independent dealers lowers prices, it's hard to see how forcing Tesla to sell its cars through middlemen would make them cheaper. Indeed, a series of studies in the nineteen-eighties found that the various rules protecting dealers led to higher prices--six per cent higher, according to an estimate by the Federal Trade Commission. And in 2001 the Consumer Federation of America estimated that restrictive franchise laws could be costing consumers as much as twenty billion dollars a year. In any case, no one expects dealers to disappear. The question is whether automakers should be legally banned from trying out new ways to sell their cars.

This is just one example of the many regulations that purport to protect the consumer while actually operating at the consumer's expense. It lends to a climate that "discourages innovation, raises prices, and makes life hard for people trying to start new businesses--or even just get a new job." Next time you think you need protecting, think twice. 

Image: Wikimedia Commons

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