Tuesday, September 20, 2016

Regulation and Prices

Be running up that road
Be running up that hill
Be running up that building
--Kate Bush

What effect does regulation have on prices? In industries that are highly regulated, prices tend to increase over time. In relatively unregulated industries, prices tend to fall?

Regulations increase the cost of doing business for producers. Where possible, producers will pass those cost increases on to consumers in the form of higher prices.

Moreover, regulation raises entry barriers for new firms. Entrepreneurs, recognizing higher costs of entry posed by regulation, avoid pursuing opportunities that may exist in highly regulated industries. This removes a major source of innovation and productivity improvement from the economy.

It also protects the franchises of established firms that are prone to favor the status quo over competition and improvement.

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