Mandatory Licensing

Franz Sanchez: In this business, there's a lot of cash. And a lot of people with their hands out.
Kwang: In a word: bribery.
Franz Sanchez: Exactly. He took the words right out of my pocket.
--License to Kill

Mandatory licensing is government-imposed restriction on who can provide medical, legal support, financial advice, and other services. The standard argument in favor of mandatory licensing is that it protects consumers from low quality or high cost provision of such services.

As Jeff Miron observes, however, this argument is not convincing by itself. Because it raises the cost of doing business, particularly for entrepreneurs seeking to enter an industry, licensing limits the quantity of services available to consumers.

It also raises price and reduces innovation in markets. Entry barriers raised by licensing serve to protect the franchises of those with licenses. Competition is reduced, thereby reducing productivity gains that improve efficiency and spark innovation.

Thus, consumers pay more and get less.

Licensing, certification, or other credentials that signal certain levels of competency are not bad in and of themselves. Consumers might find them valuable in reducing search costs, for example.

But licensing should be market (voluntary), rather than government (force), driven. If consumers find licenses useful, then they will reward producers that have them.

When government requires licensing, then a small number of people benefit while large numbers of people are hurt over time.