What are the pros and cons of regulation? It’s easy to see the pros. Without some regulatory framework, how do you know what’s safe? How do you know the product is what it says it is? Where is the guarantee you won’t get cheated?
On the other hand, regulation has all kinds of downsides. So what are the pros and cons of regulation?
PROs
1. Regulation Provides a Seal of Approval
Who has time to conduct their own risk assessment? When it comes to significant investments—things like buying a car or getting a mortgage on a house, they might.
But smaller miscellaneous items? Things like mushroom kits? Do you want to investigate the source and review what others are saying? Maybe you’ll do this the first time, but every time? For each purchase? What if you’re the first buyer?
Sometimes all you need is a seal of approval. A guarantee a regulatory body has checked and approved the item you’re looking to buy and consume. Regulating goods and services means consumers can go about their day without worry or fear. Worry that the businesses they shop at might be cheating them by selling one thing and claiming it’s another. And fear that the products might be tainted or damaged somehow.
Regulation holds manufacturers and retailers accountable for the accuracy and safety of their products.
2. Regulation Provides a Universal Standard
One of the pros of regulation is that products don’t vary from place to place. A 10 ml spray bottle of 4-HO-MET, for example, would be the same no matter where in the world you buy it. The same goes for blotters and pellets. A body of regulators could organize nootropic categories.
A universal standard provides stability in the market. It allows for the smooth transition of goods and services. And without regulation, who maintains these standards? Businesses have every incentive to increase profits, and consumers have every incentive to look for the lowest prices. Without regulation, the tension between these two forces can pull apart a functioning market and leave it in ruins.
3. Regulation Creates Licensing
Another pro of regulation is its ability to act as a gatekeeper by creating a licensing system. For without licensing requirements, how can one enforce regulatory standards?
Licensing limits the supply of producers to professionals only. Ask anyone if they’d rather have a licensed or unlicensed electrician work on their house, and the answer is obvious. The professional standards a licensed business must meet ensure consumers stay safe.
And licensing can have ripple effects across businesses. Professionally licensed manufacturers, for example, are more likely to provide better working conditions. Assuring consumers of higher qualifications.
4. Regulation Allows for a Legitimate Use of Force
Another pro of regulation is the legitimate use of force. Regulatory standards are no good if the manufacturer won’t let the inspector into their factory. The use of force in compliance is one of the main arguments for regulation. Sometimes it’s not enough to fine poor conduct; one needs to involve the legal system.
5. Regulation Provides Protection from Liability
Regulations don’t simply infringe on producers‘ freedoms in the name of helping consumers. Regulation can also help producers when things go wrong.
For example, suppose someone wanted to try a psychedelic but then had a bad experience. Could this person sue? Let’s say they did, and let’s say they won. What kind of financial damage might the verdict produce? Could a lawsuit threaten an entrepreneur’s personal assets?
Or take an accidental fire as another example. It burns down an entire laboratory, and the manufacturer is out millions. Regulating liability can help since the manufacturer won’t be on the hook for the total costs of the damage.
But wait, isn’t this just confusing regulation with insurance? And the answer is sort of, which brings us to our list of cons to regulation.
CONS
1. Regulation Conceals True Costs
Regulation happens with or without a regulatory body. Producers could, theoretically, put incorrect labels on their products. Would consumers know? Maybe not at first. But eventually, customers would find out, and they’d likely never use that business again. They’d find a more honest competitor.
So in a way, businesses regulate themselves by appealing to consumers, bringing us to the cons of regulating liability. Couldn’t private insurance and accreditation agencies cover what we traditionally think of as the role of government regulation?
A major con of government regulation is that it’s costly and not consistently effective. Sometimes, the pros of regulations become cons by unintended consequences.
Take a real-life example: The 2010 BP oil spill in the Gulf of Mexico. They never had to pay the total costs of their mistake because of limited liability regulations. Did that create poor incentives? Would the oil spill have happened if the company knew an error would be costly enough to bankrupt them? Or did liability regulations incentivize them to cut some corners?
2. Regulations Can Destroy Innovation
Researchers and entrepreneurs require the freedom to make mistakes and gather new information. But often, in the quest to regulate and save consumers from themselves, regulators destroy the innovation process. Regulations can become too excessive to the point that they impose universal standards and practices on everyday items like bottle openers and t-shirts. And these can hurt small businesses.
Or take, for example, the CBD regulations in Canada. In Canada, cannabis is legal federally, including all the plant compounds. Despite being mainly non-psychoactive and good at treating inflammation, among other illnesses, CBD remains highly controlled and regulated, as if it were a dangerous menace to society. And thus, its price is held artificially high by regulatory constraints.
Additionally, these CBD regulations harm the environment. Hemp has all kinds of industrial uses; it can replace fossil fuels and plastics. But first, well-meaning regulators need to step out of the way.
3. Regulatory Capture
Political and corporate interests can drive regulatory bureaucracy. This phenomenon is known as regulatory capture. Economists acknowledge that companies with enough capital and the right political connections manipulate regulations to increase profits and market share.
4. Regulations Undermine Traditional Cultures
Perhaps the most significant con of regulation is how they can undermine traditional, local cultures. Take cathinone, for example. An alkaloid found in the shrub khat, it is used by over 20 million people daily in the Arabian Peninsula and East Africa. It is said to have originated in Ethiopia, where it remains an essential cultural item. It is also a critical part of their economy. The same goes for places like Yemen and Kenya.
Chewing khat leaves is like drinking coffee or tea for Westerners in these cultures. Indeed, khat’s active ingredient, cathinone, is like caffeine because it is an anti-fatigue drug. Students and workers use it to stay alert.
But, the World Health Organization (WHO) worries people are abusing this substance. They encourage local regulation by authorities to the point of prohibition. They’ve scheduled cathinone under the category of illegal narcotic drugs. They addressed concern about its „addictiveness“ despite its psychological dependency being less than tobacco or alcohol.
With this kind of viewpoint, would regulation of khat help or hinder the 20 million people using it daily?
Regulations: Pro or Con?
There are plenty of pros and cons to regulation. But on the pro side, there is a law of diminishing returns. At one point, regulating can become a net negative. It can even cause the thing regulators are trying to prevent.
Focusing on private insurance and voluntarily-funded accreditation agencies (competitive over their status as the best regulator) could likely lead to better results than government bureaucracy funded by taxpayers.
That said, there are pros to regulations that can use force legitimately. Because when it comes to regulation, to keeping producers honest and consumers safe, sometimes a little more than persuasion and status are necessary to get the job done.
