Editor’s Note: The complete Working Paper, “Regressive Effects of Regulation” is attached here. Below is the Abstract and a portion of the Introduction.
From: Mercatus Center/George Mason University
By Diana Thomas
This paper highlights the unacknowledged burden regulation of health and safety has placed on low-income households. Billions of dollars are spent every year to reduce life-threatening risks that arise from auto travel, air travel, air and water pollution, food, drugs, construction, and the list goes on. Today, some form of regulation affects nearly every aspect of our lives (Shleifer 2010). All of it intends (at least nominally) to make consumers better off. The types of risks subject to regulation, however, are often negligible. By focusing on the mitigation of low-probability risks with higher cost, regulation reflects the preferences of high-income households and effectively redistributes wealth from the poor to the middle class and the rich. This suggests that beyond the well-known knowledge and information problems associated with intervention, there is an additional redistributive effect.
Today, some form of regulation affects nearly every aspect of our lives (Shleifer 2010). We spend billions of dollars every year to reduce life-threatening risks that arise from auto travel, air travel, air and water pollution, food, drugs, construction and many other potential perils of modern life. At least nominally, these expenditures intend to make consumers better off. The types of risks that are regulated, however, are often small, especially compared to the risks we face from various common events and activities that cause illness, injury, and death. In particular, many of the risks we manage privately are significantly larger than those regulatory agencies manage. For example, people make private decisions determining their diets, how safe of a car to buy, whether to install smoke detectors, the type of neighborhood in which to live, and counseling for drug and alcohol problems. As regulatory agencies address smaller and smaller risks—thereby driving up the prices of many consumer goods and lowering wages of workers in regulated industries—they crowd out expenditures people would make in their private lives that address larger risks and perhaps cost less than government risk regulation. This crowding out phenomenon will affect the less well off before it affects the wealthy because lower-income consumers may face higher risks in some areas of their lives and might wish to spend less on risk reduction overall. In this sense, regulation of health and safety risks, particularly regulation of small risks that are expensive to mitigate, can have a regressive effect on household income. By driving up the prices of the goods and services people consume and lowering wages, such regulations force low-income households to contribute financially to the mitigation of risks they might not mitigate privately. To illustrate this regressive effect of regulation in more detail, this paper estimates the private cost of mitigating particular risks for low-income households and compares them to the costs of different types of regulation.