Rules, Regulations, and Social Benefits (UPDATED)

By ·July 22, 2022
Columbia University

The Issue:

The Supreme Court’s June 30, 2022 decision in West Virginia v. Environmental Protection Agency, which struck down an EPA plan to reduce carbon emissions from power plants, is likely to have reverberations beyond the environmental arena and make it more difficult to defend other types of regulation in areas ranging from education to transportation and food. The court’s decision upholds that an agency issuing regulations must point to ‘clear congressional authorization’ for the power it claims. In practice, curtailing government agencies’ regulatory power by requiring much more explicit and involved Congressional approval could hamper the federal government’s ability to regulate economic activity. While regulations can impose costs on companies and can in some cases be excessive, there are also circumstances under which regulations provide broader societal benefits.

Regulations can benefit society by limiting activities that advantage a particular company at the expense of a much wider group.

The Facts:

  • When there is competition between firms, workers are perfectly mobile, and consumers make their purchasing choices based on sound information, society overall benefits: goods are produced more efficiently, workers can opt for better working conditions, and consumers have access to lower prices and better quality. But, when these conditions are not fully met, the result can be less than optimal. Under what circumstances can a case be made for government regulation?
  • When an activity firms conduct imposes a cost on others, they tend to do a lot more of it than they would if they had to be responsible for all the costs. Pollution is a case in point. Companies may pollute the air or the nearby water in the process of production. If the firms don’t pay for the cost of their pollution, society does, through mechanisms such as sicker citizens, lower quality of life, and costs to future generations through climate change. The government can force companies to take account of the social costs of their production by making them take actions that limit the amount they pollute. For example, factories and energy-producing facilities that burn coal have been required to install “scrubbers” to reduce the amount of pollution they emit. The cost of installing these scrubbers reduces companies’ profits, but improves the environment around these facilities, and even across a much wider area. An individual company might benefit from the removal of regulations that prevent it from polluting, and its stock price could rise in anticipation of these benefits, but many others would be made worse off.
  • Providing consumers with important information is another example where government regulation can improve the lives of many people even while imposing some costs on individual companies. Consumers may have less information than companies do about the product the company is selling, and it might be difficult for individuals to gather or evaluate relevant information. When individuals buy food or drugs, they may not know the contents of the products, which may limit their ability to make informed decisions. As a result, the government may regulate the disclosure of nutrition information or ingredients. Similarly, individuals buying a house might not know whether there is lead paint on the walls, so sellers may be required to disclose this.
  • Regulation can also limit activities whose harm may not be obvious to many consumers. An example of this was the Fiduciary Duty rule issued by the Obama administration in 2016. The rule required financial advisers to meet a “fiduciary standard” and act in the best interest of their clients, even if the adviser would benefit from behaving otherwise. Some firms use commission-based fees, which create incentives for financial advisers to steer clients into products that may have higher fees and lower returns. At the time, government estimates calculated that this conflicted advice could be costing families $17 billion per year. (A federal appeals court vacated the measure in 2018.) 
  • Workers in some industries may face hazardous working conditions that they may not know about or that they find difficult to avoid. These workers may not fully understand the danger they face, or they may find it difficult to negotiate with their managers because they have limited power in their relationship, especially if they do not have a collective voice through a union. Regulations passed regarding the presence of Silica and Beryllium at the workplace, for instance, limit worker exposure to these toxic substances and can save lives.

What this Means:

While regulations may be costly to businesses, there are a number of reasons why we, as a society, should embrace government intervention and regulations when they lead to socially beneficial outcomes. Regulations and rules have benefits as well as costs. Deciding which rules and regulations are, on net, beneficial requires careful cost-benefit analyses, and in the past these analyses were regularly undertaken to evaluate proposed federal rules.

  • Editor's note: This is an updated version of a post originally published on March 8, 2017.

  • Topics:

    climate change / Deregulation / Governance / Occupational Safety
    Written by The EconoFact Network. To contact with any questions or comments, please email [email protected].
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