Why the Best Form of Regulation is Competition
LI-PAPER. Regulation is necessary. The question is, however, who can perform this task best and most efficiently.
Government regulations typically cause new problems, such as unforeseen consequences and side-effects, which in turn make new regulations necessary. Government regulations also arouse a deceptive sense of security and let one's own responsibility erode. Also, overregulation leads to the emergence of black markets, where products of questionable quality are offered. Excessive quality standards may drive up prices for consumers unnecessarily.
An alternative to state intervention is regulation through market mechanisms. For example, the reputation of a company or a brand limits the scope for fraud. Even in the case of asymmetric information between customers and companies, there is an entire industry on the open market that offers solutions: e.g., private certification bodies, guarantees and free trials. Even extreme situations such as exploitation of workers can be tackled in a competitive market. Freedom of contract ensures that people only sign contracts that they consider beneficial and can get out of those contracts that no longer meet their expectations.
Regulators have traditionally followed the textbook theory by defining competition as the degree of market concentration. Rather, a competitive market would have to be judged by whether it is free for new entrants. Because governments tend to be the ones to blame for these obstacles, their main task is to reduce such access barriers.
(6 pages, PDF)