Monday, June 15, 2009

Ross: Why Government Should Have Regulatory Powers

We're going to try something a little different for this TPS Discussion. I'm going to play devil's advocate and argue in favor of allowing governments to have regulatory authority over individual actions. Regular readers know this is generally against the grain for me, but I promise to put my best foot forward in debate with my fellow TPSers, no intentional straw men here. Here goes nothing:

To have a meaningful system of private property rights serve as the basis of an economy, they must have legal protection. As Gwartney et al (2008, p.33) puts it:

Legal protection against invasion from other individuals who would seek to use or abuse the property without the owner's permission.

Legal protection in common law typically deals with ex-post violations of property rights. If I damage your property, I am required to pay due compensation and perhaps face criminal charges (including negligence). Similarly, if we engage in a voluntary transaction, if I fail to come through on the terms of agreement I may be subject to similar civil or criminal charges. This incentivizes others to consider the wishes of others when choosing their action. It's okay to drink alcohol, but if you wind up hurting someone under the influence you will be punished. Legal protection dramatically increases the effectiveness of private property rights to create the incentives for efficient markets.

So we agree if people engage in behavior that damages others after the fact, is there any behavior that one might engage in that would have a high enough probability of damaging others that we would want to ban or regulate it ex-ante, if for no other reason than to provide confidence in others of the protection of their property? A few examples:

  1. We mandate drivers purchase liability auto insurance, and driving without it is punishable even if you cause no harm. In the case of an accident, it is relatively easy for an at-fault driver to cause far more damage than they would be capable of compensating the damaged owners. Anyone can easily cause several hundred thousand dollars in damage, yet very few of us could repay a debt like that, and at the very least the legal claims of compensation would carry little credibility.
  2. In cases of an institutional failure to adequately provide ex-post legal protection of property, ex-ante protection is a second best solution. For instance, we do not allow people to build nuclear reactors for their own private use. If something were to go wrong, there is no credible compensatory mechanism for those who are damaged. Until one is devised, regulations must do.

Not all regulations are property rights protection, but we don't fault markets for not achieving nirvana status, so we should afford regulations the same respect.

There you have it TPSers! Am I wrong? Why am I wrong?

Follow Up:
Matt Responds

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