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Why would a company WANT added regulation?

Recently some social media interests have been calling for added government regulations. The public is peppered with advertisements regarding this very issue. So often, we think of regulation as anti-business; in reality, that’s not always the case.

While there are prominent examples of regulations that have an unintended (or intended) consequence of disrupting business, some laws help businesses. For example, regulations that protect public health and safety are also often needed.

The devil in regulations is in the detail. In sectors such as pharmaceuticals, laws should protect public health. Companies also receive protections for a while, preventing medications from being copied by companies that did not pay for an extended period of research and development.

Regulations that protect the public are accepted by most.

Things become controversial when people don’t want to be “protected.” The question that is not always answered is: protected from what?

Back to the social media regulations, a platform that relies on many users would want to appeal to a large and diverse number of users. So, why would these companies wish to add regulation? Perhaps it comes down to maintaining dominance. Regulations create a barrier to entry, which is true of many industries. For example, a large, well-funded company can easily support a division that maintains regulatory compliance. However, only a fraction of one percent of the company’s resources needs to be devoted to this task. When you compare that to a small startup company with the exact compliance workload, they will need to dedicate a more significant percentage of their resources to compliance. This can be an insurmountable obstacle to new businesses.

Adam Smith, who has been called the father of modern economics, said: “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”… “Profit-seeking entrepreneurs continuously move resources to more valuable uses, and in the process create economic growth and development…”

Essentially, regulation CAN provide a competitive advantage to already established companies and inadvertently or advertently squelch competition. In some cases, the result is a lack of competition and, therefore, fewer choices and higher consumer prices.

When regulations benefit one group or business over another, barriers to entry become higher. Laws, even those that are “necessary,” will cost the consumer in the form of increased prices and less availability of products and services. These consequences would appear to harm lower-income earners disproportionately. For example, when a product increases in cost by 10% for whatever reason, a larger percentage of the lower wage earner will be required to make that purchase vs. the higher wage earner.

In cases where the most vulnerable are ultimately the most negatively impacted, one might ask why regulation would be enacted?

And why are regulations that hurt the vulnerable approved by those that proudly announce their advocacy of those same people? It may be as innocent as a lack of understanding by those responsible for the regulation. However, before you dismiss this possibility in favor of a more cynical answer, consider reading the job description for a member of Congress.

Look at the section that describes qualifications for the job. If you locate it, please let me know.

Thanks for reading.

February 2022

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