John Puri writes for National Review Online about one negative consequence of government regulation.
Government regulations often impose different costs under different conditions, thereby altering firms’ behavior by changing which activities are more or less profitable. Usually, markets are excellent at balancing the cost of projects with their projected value, yielding beneficial results of all kinds. But, by distorting relative cost structures, such artificial incentives drive labor and resources away from their most productive uses. Businesses are led to make more decisions with regulators in mind — not their consumers.
One variety of this phenomenon is called “bunching,” or the abnormal concentration of firms right below a specific policy threshold — such as a size or output limit — because they intentionally stop short of crossing that line to avoid the associated costs. If the costly threshold did not exist, many firms would presumably exceed it and produce more.
In America, bunching often occurs in construction due to housing regulations. …
… The result of this policy program (which was intended to boost housing construction) is fewer housing units overall, as developers who would previously build more than 100 units now cap themselves at 99. But at least the workers on projects that don’t exist are paid higher minimum wages. …
… Here too, larger housing would exist if regulators did not impose an arbitrary notch of hugely added expense.
The phenomenon of bunching happens in many areas beyond housing. Around the world, it affects sales prices, companies’ number of employees, stock issuance, and even the size of fishing boats.
The proper lesson for policymakers is that rules should be applied generally, absent cutoffs or special thresholds. Sometimes this principle cuts against deregulatory efforts that seek to carve out smaller companies from burdensome rules. A superior approach would be that, if a given regulation is too costly for many targeted businesses to follow, perhaps it should be repealed entirely.
