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As Alexander rightly notes, these problems of asymmetric information and misaligned market behavior aren’t just limited to areas like insurance and long-term savings. Even ordinary off-the-shelf consumer products are often accompanied by similar issues, and this can make it more difficult for people to make perfect market decisions on their own. In order to correct for consumers’ inability to ever be 100% fully informed about 100% of the products they buy, then, government can play a valuable role in performing that function on their behalf, using its regulatory power to protect them against being misled and helping them avoid buying products they wouldn’t actually want to buy if they knew better. Here’s Alexander again:

[Q]: What do you mean by “lack of information”?

Many economic theories start with the assumption that everyone has perfect information about everything. For example, if a company’s products are unsafe, these economic theories assume consumers know the product is unsafe, and so will buy less of it.

No economist literally believes consumers have perfect information, but there are still strong arguments for keeping the “perfect information” assumption. These revolve around the idea that consumers will be motivated to pursue information about things that are important to them. For example, if they care about product safety, they will fund investigations into product safety, or only buy products that have been certified safe by some credible third party. The only case in which a consumer would buy something without information on it is if the consumer had no interest in the information, or wasn’t willing to pay as much for the information as it would cost, in which case the consumer doesn’t care much about the information anyway, and it is a success rather than a failure of the market that it has not given it to her.

In nonlibertarian thought, people care so much about things like product safety and efficacy, or the ethics of how a product is produced, that the government needs to ensure them. In libertarian thought, if people really care about product safety, efficacy and ethics, the market will ensure them itself, and if they genuinely don’t care, that’s okay too.

[Q]: And what’s wrong with the libertarian position here?

[The previous section described] how we can sometimes predict when people will make irrational choices. One of the most consistent irrational choices people make is buying products without spending as much effort to gather information as the amount they care about these things would suggest. So in fact, the nonlibertarians are right: if there were no government regulation, people who care a lot about things like safety and efficacy would consistently be stuck with unsafe and ineffective products, and the market would not correct these failures.

[Q]: Is this really true? Surely people would investigate the safety, ethics, and efficacy of the products they buy.

Below follows a list of statements about products. Some are real, others are made up. Can you identify which are which?

1. Some processed food items, including most Kraft cheese products, contain methylarachinate, an additive which causes a dangerous anaphylactic reaction in 1/31000 people who consume it. They have been banned in Canada, but continue to be used in the United States after intense lobbying from food industry interests.

2. Commonly used US-manufactured wood products, including almost all plywood, contain formaldehyde, a compound known to cause cancer. This has been known in scientific circles for years, but was only officially reported a few months ago because of intense chemical industry lobbying to keep it secret. Formaldehyde-containing wood products are illegal in the EU and most other developed nations.

3. Total S.A., an oil company that owns fill-up stations around the world, sometimes uses slave labor in repressive third-world countries to build its pipelines and oil wells. Laborers are coerced to work for the company by juntas funded by the corporation, and are shot or tortured if they refuse. The company also helps pay for the military muscle needed to keep the juntas in power.

4. Microsoft has cooperated with the Chinese government by turning over records from the Chinese equivalents of its search engine “Bing” and its hotmail email service, despite knowing these records would be used to arrest dissidents. At least three dissidents were arrested based on the information and are currently believed to be in jail or “re-education” centers.

5. Wellpoint, the second largest US health care company, has a long record of refusing to provide expensive health care treatments promised in some of its plans by arguing that their customers have violated the “small print” of the terms of agreement; in fact they make it so technical that almost all customers violate them unknowingly, then only cite the ones who need expensive treatment. Although it has been sued for these practices at least twice, both times it has used its legal muscle to tie the cases up in court long enough that the patients settled for an undisclosed amount believed to be fraction of the original benefits promised.

6. Ultrasonic mosquito repellents like those made by GSI, which claim to mimic frequencies produced by the mosquito’s natural predator, the bat, do not actually repel mosquitoes. Studies have shown that exactly as many mosquitoes inhabit the vicinity of such a mosquito repellent as anywhere else.

7. Listerine (and related mouth washes) probably do not eliminate bad breath. Although it may be effective at first, in the long term it generally increases bad breath by drying out the mouth and inhibiting the salivary glands. This may also increase the population of dental bacteria. Most top dentists recommend avoiding mouth wash or using it very sparingly.

8. The most popular laundry detergents, including most varieties of Tide and Method, have minimal to zero ability to remove stains from clothing. They mostly just make clothing smell better when removed from the laundry. Some of the more expensive alkylbenzenesulfonate detergents have genuine stain-removing action, but aside from the cost, these detergents have very strong smells and are unpopular.

[Q]: Okay, I admit I’m not sure of most of these. What’s your point?

This is a complicated FAQ about complicated philosophical issues. Most likely its readers are in the top few percentiles in terms of intelligence and education.

And we live in a world where there are many organizations, both private and governmental, that exist to evaluate products and disseminate information about their safety.

And all of the companies and products above are popular ones that most American consumers have encountered and had to make purchasing decisions about. I tried to choose safety issues that were extremely serious and carried significant risks of death, and ethical issues involving slavery and communism, which would be of particular importance to libertarians.

If the test was challenging, it means that the smartest and best-educated people in a world full of consumer safety and education organizations don’t bother to look up important life-or-death facts specifically tailored to be relevant to them about the most popular products and companies they use every day.

And if that’s the case, why would you believe that less well-educated people in a world with less consumer safety information trying to draw finer distinctions between more obscure products will definitely seek out the consumer information necessary allows them to avoid unsafe, unethical, or ineffective products?

The above test is an attempt at experimental proof that people don’t seek out even the product information that is genuinely important to them, but instead take the easy choice of buying whatever’s convenient based on information they get from advertising campaigns and the like.

[Q]: Fine, fine, what are the answers to the test?

Four of them are true and four of them are false, but I’m not saying which are which, in the hopes that people will observe their own thought processes when deciding whether or not it’s worth looking up.

[Q]: Right, well of course people don’t look up product information now because the government regulates that for them. In a real libertarian society, they would be more proactive.

All of the four true items on the test above are true in spite of government regulation. Clearly, there are still significant issues even in a regulated environment.

If you honestly believe you have no incentive to look up product information because you trust the government to take care of that, then you’re about ten times more statist than I am, and I’m the guy writing the Non-Libertarian FAQ.

[Q]: What other unexpected consequences might occur without consumer regulation?

It could destroy small business.

In the absence of government regulation, you would have to trust corporate self-interest to regulate quality. And to some degree you can do that. Wal-Mart and Target are both big enough and important enough that if they sold tainted products, it would make it into the newspaper, there would be a big outcry, and they would be forced to stop. One could feel quite safe shopping at Wal-Mart.

But suppose on the way to Wal-Mart, you see a random mom-and-pop store that looks interesting. What do you know about its safety standards? Nothing. If they sold tainted or defective products, it would be unlikely to make the news; if it were a small enough store, it might not even make the Internet. Although you expect the CEO of Wal-Mart to be a reasonable man who understands his own self-interest and who would enforce strict safety standards, you have no idea whether the owner of the mom-and-pop store is stupid, lazy, or just assumes (with some justification) that no one will ever notice his misdeeds. So you avoid the unknown quantity and head to Wal-Mart, which you know is safe.

Repeated across a million people in a thousand cities, big businesses get bigger and small businesses get unsustainable.

[Q]: What is the significance of lack of information?

It justifies some consumer and safety regulations, and the taxes necessary to pay for them.

Holmes and Sunstein affirm these points:

In the absence of government machinery capable of detecting and remedying misrepresentation and false dealing, free exchange would be an even more risky business than it is. The act of buying and selling is often worrisome in the absence of reliable means to counteract the asymmetry of knowledge between buyer and seller. The seller frequently knows something the buyer needs to know. That is one reason why the risk-averse fear commercial exchanges as possible scams, why they cling to suppliers they know personally rather than shopping around for bargains. Public officials can discourage this kind of clinging, promote market ordering, and discourage swindlers by insuring against any damage arising from the asymmetry of information between buyers and sellers. To help consumers make rational choices about where to obtain credit, for instance, the Consumer Credit Protection Act forces any organization that extends credit to disclose its finance charges and annual percentage rate. Just so, consumers benefit from competitive markets in restaurants because, as voters and taxpayers, they have created and funded sanitation boards that allow them to range adventurously beyond a restricted circle of personally known and trusted establishments. The enforcement of disclosure rules or antifraud statutes is no less a taxpayer-funded spur to market behavior than government inspection of food handlers.

The appropriate level of federal spending and government oversight will remain controversial. Nothing said above is intended as a defense of any particular program; some existing programs should undoubtedly be scaled down. What cannot be denied is that enforceable antifraud legislation is a common good, embodying biblically simple moral principles (keep your promises, tell the truth, cheating is wrong). Moreover, the benefits of antifraud law cannot be captured by a few but are diffused widely throughout society. It is a public service, collectively provided, and serving to reduce transaction costs and promote a free-wheeling atmosphere of buying and selling that would be very unlikely to arise if “caveat emptor!” were the sole rule.

Anti-statists will often argue that in a purely free market, all that’s really needed to ensure that products are safe and effective is to allow companies to compete with each other for customers; their drive to maximize profits will be all the incentive necessary for them to provide customers with the most desirable products possible. But while it’s certainly true that companies are fundamentally motivated to maximize profits by convincing as many customers as possible to buy their products, there’s no law of economics that says this can only be done by providing products that are safe and effective; in some cases, companies can increase their profits by doing exactly the opposite, cutting corners on product quality and simply deceiving their customers into thinking they’re getting better products than they actually are. And in fact, this is exactly what we see in underdeveloped countries that lack good government regulation; without a capable public overseer to serve as referee and ensure that everyone is doing business safely and honestly, the market is dominated by sellers who don’t do business safely and honestly – shady companies selling defective products, snake oil salesmen peddling phony cure-alls with dangerous ingredients, scammers duping people out of their money with misleading pitches, etc. And we can even see the same thing here in the US when particular industries are able to avoid regulations to keep them in line – as we saw, for instance, in the financial industry leading up to the crisis of 2008. It’s simply a natural outcome of the system working within the constraints (or lack thereof) that have been imposed on it, as James K. Galbraith writes:

Without reliable standards, without clear guidelines as to what is safe and reasonable and what is not, the overall efficiency of the market declines because search and transaction costs rise beyond all reasonable limits. The efficiency of the market becomes limited by the fear of fraud. Shopping, far from being the exercise of market freedom, becomes itself an endless absorber of time and attention, whether one is discussing clothes, electronics, cell phone contracts, a mortgage application, or airline seats from New York to Pittsburgh.

Meanwhile, the capacities to manipulate, change, innovate, differentiate, discriminate, and exploit become in their turn the defining characteristics of corporate success. And those who pursue such strategies the most aggressively are, naturally, the heroes of the corporate world. It is not that there is a thin line between meeting consumers’ needs and presenting them with complex choices intended to make them easier to fleece. It is that there is no line at all: one practice bleeds over into the other. Success in meeting needs and success in screwing the vulnerable cannot be readily distinguished. […] The interaction of complexity and deregulation transforms and actually criminalizes the market.

The fact that sellers naturally turn to this kind of chicanery in the absence of regulatory oversight is not, we should note, just a matter of them being greedy or evil or otherwise flawed as human beings. Many of them certainly may be greedy or flawed, of course, but as Richard Wolff writes:

When capitalists [engage in antisocial business practices], those are behaviors prompted in them by the realities of the system within which they work and for which they are rewarded and praised. Many capitalists do these things without being greedy or evil. When capitalists do display greed or other character flaws, those flaws are less causes than results of a system that requires certain actions by capitalists who want to survive and prosper.

The harsh reality is that in a market system, the constant need to compete for customers will always compel companies to do whatever they can – that is, whatever they’re allowed to do – to maximize their share of the market, lest they be forced out of business altogether. As Alexander puts it:

Companies in an economic environment of sufficiently intense competition are forced to abandon all values except optimizing-for-profit or else be outcompeted by companies that optimized for profit better and so can sell the same service [or what customers think is the same service] at a lower price.

This is why it’s crucial to have a government that can constrain the space of “whatever sellers are allowed to do” to not include unsafe or deceptive practices that take advantage of unknowing customers – because if such rules aren’t put in place, sellers can and will exploit those practices to their fullest possible extent.

Companies’ ability to engage in ethically dubious tactics like this is only exacerbated by the “limited liability” structure under which modern corporations are organized. Under this model, a company’s ownership rights may be dispersed among multiple stockholders (as opposed to just one owner) – which has the positive benefit of enabling people to establish businesses without the concern that they’ll personally lose everything if these ventures fail, but which also has the negative consequence of enabling corporations to pursue harmful business practices while at least partially shielding the owners from paying for those actions. As the term “limited liability” suggests, under the corporate model each individual stockholder is only partially responsible for whatever misconduct might occur within their businesses — so no one ever really pays the full price for it. (Ambrose Bierce’s tongue-in-cheek Devil’s Dictionary defines the corporation as “an ingenious device for obtaining individual profit without individual responsibility.”) And although this is an understandable approach for ensuring that innocent stockholders aren’t punished for wrongdoing they had nothing to do with, it also has the negative side effect of making such wrongdoing easier to pull off in the first place for companies that are so inclined; it’s that old familiar problem of moral hazard again. In order to preclude this possibility, then, it makes sense to have the government impose certain standards that companies must follow if they want to organize themselves under a corporate structure. As commenter trisweb writes:

“Free Market” proponents opposed to regulation of corporations have got it completely wrong. You can do business without incorporating, and accept full responsibility for your own decisions and actions… although you’ll be considered a fool for doing so. If you accept the protections, then you are obliged to accept such restrictions as society may impose for its own protection. We can certainly discuss the value of particular regulations – whether they are excessive or insufficient, whether they accomplish what is intended or not, whether they are being properly enforced or not – but not whether or not regulation is appropriate. If you take the benefits, you get the drawbacks too. […] Regulation is the price paid for doing business under the protections of a corporate entity.

A common criticism of government regulation is that it impedes the market process and makes it less efficient. But as Tim Wu points out:

When [deceptive behavior on the part of businesses] confuses, misleads, or fools customers, it does not aid the market process, or indeed any process premised on informed choice, but instead defeats it.

By contrast, when the government puts regulations in place to ensure that transactions are being conducted safely and transparently, it actually improves the market process. Alexander elaborates:

[Q]: Give an example of a government intervention that actually improves a market.

Food labeling.

Let’s say you learn you’re at risk for osteoporosis, a bone disease. You go to the supermarket and buy a block of cheese that advertises itself as being “high calcium!”, a frozen pizza that says “Helps fight osteoporosis!”, a frozen steak that says “May increase bone density!” and a supplement that says “Clinically proven to prevent osteoporosis!”

What if the cheese is high calcium compared to, say, dirt, but has no more calcium than any other block of cheese, and perhaps less? What if the pizza contains such a tiny amount of osteoporosis-fighting chemicals as to be a thousand times less than the clinically significant level, even though supposedly every little bit “helps”? What if the frozen steak contains no calcium at all, and the “may increase bone density” claim ought to have been read as “Well, for all we know it may increase bone density, although we have no evidence for this.” What if the supplement was “proven” to work in a sham study conducted by the supplement manufacturer and rejected by all qualified scientists?

Government regulation of food is currently spotty, and different standards are applied to different kinds of claims and different kinds of food. But in cases where the government doesn’t regulate food labels, this is exactly the kind of thing that happens. You can’t sue the companies for false advertising, because they’ve made a special effort not to say anything that’s literally false. But they’ve managed to throw off the free market and confuse your ability to honestly purchase healthy food anyway.

[Q]: But the free market would solve this problem. Without government, if people really want to buy healthy foods, private industry will invent a better certification procedure that health-conscious people can choose to follow.

I chose this example precisely because government regulation is so spotty. There are many areas the government completely fails to regulate, has failed to regulate for decades, and in that time, nothing even resembling a trustworthy well-known independent certification agency has arisen.

There are a couple of reasons why this might be. First, some large companies have tried to invent their own certification system, promising that they will only put “low fat” stickers on their food if it has less than a certain number of grams of fat. But it’s impossible to compare these systems to one another: a product that qualifies as “low fat” under Kraft’s system might have more fat than a product that doesn’t qualify as “low fat” under Kashi’s system. There are significant incentives for a company to create its own system such that its flagship products qualify as “low fat”, and companies have taken these incentives. Although it would be nice if consumers exerted pressure on these companies to use an independent standardized certification agency, after decades of lax government regulation this has yet to happen, and there’s no reason to believe it will happen in the future.

Also, most consumers either aren’t very skeptical or just plain don’t have enough time to dedicate to researching the latest information on competing food labelling practices. If a box of cookies says “low fat” on it on a colorful star-shaped sticker, that’s good enough for us. Did you investigate further last time you bought a low-fat or high-vitamin or loaded-with-anti-oxidants product? It is all nice and well to wish that people were more rational in their buying decisions, but wishing just doesn’t help.

Consider also the list of nutrients, calories, and so on prominently featured on most food item sold in US supermarkets. Do you find that useful? I do. I like to know how many calories food has before I buy it. I’ve even based buying decisions entirely on that information.

Do you think companies would voluntarily list that information even in the absence of government regulations forcing them to do so? If your answer is “yes”, how come large restaurant chains, which aren’t regulated, practically never list nutritional information on menus? It’s not that there’s no demand: voters in several American cities have supported laws to force restaurants to provide such information, so obviously a lot of people want it. Restaurants have just concluded that it’s more profitable for them to avoid it. I think they’re probably right.

It’s also worth noting that in countries with less strict supermarket labelling laws, supermarket labels contain much less information: this is true even in countries with flourishing free markets.

What all this means is that the existence of government regulations on food labelling practices actually make an improvement over free market conditions. Consumers get more information and purchase goods more efficiently than they would under laissez-faire conditions.

Now, if you’re a real hard-liner, you might acknowledge all of these points and still reject the idea of government regulation anyway, on the simple grounds that however capable or incapable customers might be of informing themselves about their purchases, the responsibility for doing so should be theirs alone, because the transactions are just between them and the sellers and no one else. The thing is, though, transactions aren’t always just between the buyers and sellers alone – they’ll often have side effects that affect the rest of society as well (recall our whole discussion earlier of negative externalities) – and in such cases, it’s only reasonable that the rest of society should therefore also have some say in the terms of those transactions. Alexander (writing in the midst of the post-2008 recession) continues on this point:

[Q]: Government regulation denies corporations the right to make choices that affect only them and their consenting customers.

In many cases this is true, and in some of those cases I oppose the regulation. However, other regulations exist precisely because cases that appear to affect only the corporation and its customers actually affect everyone.

Take the example of regulating banks. Banks made some really poor loan decisions. That means that the banks collapse and go bankrupt and their executives end out on the street (at least it would, if we didn’t keep bailing them out all the time!). Not good, but the executives deserve it, and the people who took out loans from those banks knew what they were getting into. Therefore, the correct course of action is to hope they’ll be smarter the next time around, not to regulate who banks can and can’t give loans to.

…except that when hundreds of major banks around the world go broke simultaneously, that affects a whole lot more people than just bank executives and their customers. It sends the world economy into recession, potentially creates runs on the more responsible banks, and negatively affects everyone in the world. I’ve never taken out bad loans nor condoned anyone who did so, and you probably haven’t either, but we’re both getting hurt in this recession, and we both had to pay the taxes that bailed out the banks so the economic system didn’t collapse.

I think it’s reasonable that the government, not wanting innocent people to be hurt by stupid lending policies, bans the banks from having those stupid lending policies in the first place. It’s not to protect the banks from themselves, it’s to protect everyone else from the banks.

(If you have a complicated economic reason why you don’t think the current recession was caused by poor banking policies, think up another example at your leisure.)

Similarly, it’s often argued that government shouldn’t have any business regulating the terms of employment between companies and their workers; if some particular worker is willing to work 30-hour shifts on a regular basis, why should anyone be able to stop them? But again, although such arrangements might appear to just be between employer and employee, they’ll often turn out to have secondary effects that impinge upon others outside the company. In such cases, then, as Sowell explains, outside intervention may be justifiable to limit those externalities and keep everyone safe:

While safety is one aspect of working conditions, it is a special aspect because, in some cases, leaving its costs and benefits to be weighed by employers and employees leaves out the safety of the general public that may be affected by the actions of employers and employees. Obvious examples include pilots, truck drivers, and train crews, because their fatigue can endanger many others besides themselves when a plane crashes, a big rig goes out of control on a crowded highway, or a train derails, killing not only passengers on board but also spreading fire or toxic fumes to people living near where the derailment occurs. Laws have accordingly been passed, limiting how many consecutive hours individuals may work in these occupations, even if longer hours might be acceptable to both employers and employees in these occupations.

Jonathan Haidt concludes:

Economists speak of “externalities”—the costs (or benefits) incurred by third parties who did not agree to the transaction causing the cost (or benefit). For example, if a farmer begins using a new kind of fertilizer that increases his yield but causes more damaging runoff into nearby rivers, he keeps the profit but the costs of his decision are borne by others. If a factory farm finds a faster way to fatten up cattle but thereby causes the animals to suffer more digestive problems and broken bones, it keeps the profit and the animals pay the cost. Corporations are obligated to maximize profit for shareholders, and that means looking for any and all opportunities to lower costs, including passing on costs on to others (when legal) in the form of externalities.

I am not anticorporate, I am simply [aware that the incentives faced by corporations differ depending on whether or not they are subject to public oversight]. When corporations operate in full view of the public, with a free press that is willing and able to report on the externalities being foisted on the public, they are likely to behave well, as most corporations do. But many corporations operate with a high degree of secrecy and public invisibility (for example, America’s giant food processors and factory farms). And many corporations have the ability to “capture” or otherwise influence the politicians and federal agencies whose job it is to regulate them (especially now that the U.S. Supreme Court has given corporations and unions the “right” to make unlimited donations to political causes). When corporations are given [total freedom from public oversight], we can expect catastrophic results (for the ecosystem, the banking system, public health, etc.).

I think liberals are right that a major function of government is to stand up for the public interest against corporations and their tendency to distort markets and impose externalities on others, particularly on those least able to stand up for themselves in court (such as the poor, or immigrants, or farm animals). Efficient markets require government regulation. Liberals go too far sometimes— indeed, they are often reflexively antibusiness, which is a huge mistake from a utilitarian point of view. But it is healthy for a nation to have a constant tug-of-war, a constant debate between yin and yang over how and when to limit and regulate corporate behavior.

Whether it’s a matter of keeping the water supply safe from toxic contaminants, keeping the roads safe from impaired drivers, or keeping the financial markets safe from reckless bankers, the argument for implementing preventative safety measures on the public’s behalf is the same – it’s not about creating distortions in the market, it’s about correcting distortions that have already been created by private actors, and restoring the market to a state in which everyone can make properly informed choices and all costs are accounted for. That’s not anti-market; it’s pro-market – so if we claim to care about strong markets ourselves, it’s something we should be in favor of. Granted, we should always want to keep such regulation within reasonable limits so it doesn’t end up overstepping its bounds and doing more harm than good; that should hopefully go without saying. But we shouldn’t make the mistake of pushing things so far in the other direction that we try to do away with the whole idea of government regulation altogether – because as Alexander attests, there are places all around the world where such regulation is absent, and we can see for ourselves that the results are not good:

You know all those picky rules that you hate because they’re just arrogant government bureaucrats trying to control your life? There are lots of places that don’t have those rules. They’re called hellholes. [After having personally done some traveling in the Third World,] I have developed a profound respect for everything from zoning ordinances to noise pollution laws to environmental regulations to licensing schemes for professionals to whatever law it is that says you can’t block the sidewalk (there should be a statue to whichever politician came up with that one; it is far less obvious than you’d think).

Among the most extreme examples of what he’s talking about can be found in countries like Haiti, where the lack of well-maintained standards hasn’t just resulted in lower quality of life – it has completely destroyed millions of its citizens’ lives and livelihoods outright. When the country was struck by a 7.0-magnitude earthquake in 2010, its effective lack of building codes resulted in the deaths of an estimated 100,000-316,000 people, with 300,000 more injured and 1,000,000 rendered homeless by the collapse of approximately 250,000 homes and 30,000 commercial buildings. By contrast, when San Francisco was stuck by an earthquake of equal magnitude in 1989, just 63 people were killed – still a tragedy, to be sure, but one that was far more limited in terms of scale.

This isn’t to say, mind you, that Third World countries like Haiti are the only ones that can experience tragedies as a result of under-regulation. Another of the most famous examples is the thalidomide scandal of the 1950s-60s, in which “the use of [the sedative drug] thalidomide in 46 countries by women who were pregnant or who subsequently became pregnant resulted in the ‘biggest man-made medical disaster ever,’ with more than 10,000 children born with a range of severe deformities, such as phocomelia, as well as thousands of miscarriages.” Countries like Canada, the UK, and Australia were all affected due to their relatively lax regulations – but meanwhile in the US, approval of the drug was blocked by the FDA, so Americans avoided the tragedy entirely. The FDA often gets a bad rap for being overly rigid with its regulatory oversight – and sometimes those complaints are justified – but in this case (and in many others), Americans were incredibly fortunate to have it looking out for them.

It’s undeniably true that government regulation can have its downsides – any kind of intervention in the market will always come with costs of some kind or another. But the crucial point here, as Joseph Aldy explains, is that it doesn’t just come with costs – it can also provide immense benefits – so our judgment of whether a particular regulation is good or bad should involve balancing all the relevant tradeoffs, not just looking at the downsides alone and rejecting it on that basis:

President Trump jettisoned more than 30 years of bipartisan regulatory policy on January 30 when he issued an executive order on “Reducing Regulation and Controlling Regulatory Costs.” The order requires that whenever a new regulation is enacted by any federal agency, regulators must eliminate two rules, so that the cost of complying with the new rule is offset by the costs associated with the two existing rules. But Trump misses a crucial point about government regulations: They impose costs on society, but they also produce benefits.

The executive order refers to regulatory costs 18 times, but never mentions regulatory benefits. By focusing only on costs, the president’s order focuses on corporate bottom lines and ignores society’s bottom line. If an industry is profitable but releases pollution that makes people sick, then the best outcome for society may be to pass a regulation that lowers corporate profits slightly, but also reduces expensive health problems for thousands of Americans.

[…]

Are regulations costly for business? Yes. If they weren’t, then businesses wouldn’t need government rules requiring them to eliminate lead paint and other toxins from children’s toys, make workplaces safer and disclose their financial risks. Most companies would not take these steps on their own. The question is not whether regulations represent good business investments, but whether they yield a good return for society.

When government regulators write rules, they use benefit-cost analysis to compare the benefits and costs that the rules produce for society, much as corporate leaders weigh the costs of new business ventures against their expected returns. This approach was introduced under President Ronald Reagan in 1981 and continued under Presidents George H.W. Bush, Clinton, George W. Bush and Obama.

As an example, the Environmental Protection Agency’s Acid Rain Program, enacted in 1990, has reduced sulfur dioxide emissions from U.S. power plants by more than 50 percent, at a cost of up to US$2 billion per year. It also has delivered up to $100 billion in annual benefits to society – mainly by avoiding about 18,000 premature mortalities and 24,000 nonfatal heart attacks. Electric utilities would not have reduced this pollution voluntarily, but the regulation that required them to do it has produced benefits that are worth at least 50 times its costs.

The example of pollution is especially noteworthy here, not only because it’s one of the biggest problems in the world right now, but also because in some ways, it’s oddly under-recognized. The climate change side of it gets a ton of attention, of course – but when it comes to things like ordinary air pollution, most people don’t realize just how dramatic its effects actually are. Not only is air pollution responsible for millions of premature deaths each year – it’s currently estimated to contribute to roughly 11.65% of human deaths worldwide (which is about twenty times more than the death toll from war, murder, and terrorism combined) – it also reduces quality of life for millions more due to disability and other health complications, with an estimated 213.28 million healthy life years in total being lost every year as a result of its effects (more than smoking or obesity or high cholesterol or drug use or practically any other risk factor you can think of). As Alex Tabarrok notes, its effects on everything from health to labor productivity to cognitive functioning are far more significant than is commonly understood. And David Wallace-Wells really drives the point home:

Here is just a partial list of the things, short of death rates, we know are affected by air pollution. GDP, with a 10 per cent increase in pollution reducing output by almost a full percentage point, according to an OECD report last year. Cognitive performance, with a study showing that cutting Chinese pollution to the standards required in the US would improve the average student’s ranking in verbal tests by 26 per cent and in maths by 13 per cent. In Los Angeles, after $700 air purifiers were installed in schools, student performance improved almost as much as it would if class sizes were reduced by a third. Heart disease is more common in polluted air, as are many types of cancer, and acute and chronic respiratory diseases like asthma, and strokes. The incidence of Alzheimer’s can triple: in Choked, Beth Gardiner cites a study which found early markers of Alzheimer’s in 40 per cent of autopsies conducted on those in high-pollution areas and in none of those outside them. Rates of other sorts of dementia increase too, as does Parkinson’s. Air pollution has also been linked to mental illness of all kinds – with a recent paper in the British Journal of Psychiatry showing that even small increases in local pollution raise the need for treatment by a third and for hospitalisation by a fifth – and to worse memory, attention and vocabulary, as well as ADHD and autism spectrum disorders. Pollution has been shown to damage the development of neurons in the brain, and proximity to a coal plant can deform a baby’s DNA in the womb. It even accelerates the degeneration of the eyesight.

A high pollution level in the year a baby is born has been shown to result in reduced earnings and labour force participation at the age of thirty. The relationship of pollution to premature births and low birth weight is so strong that the introduction of the automatic toll system E-ZPass in American cities reduced both problems in areas close to toll plazas (by 10.8 per cent and 11.8 per cent respectively), by cutting down on the exhaust expelled when cars have to queue. Extremely premature births, another study found, were 80 per cent more likely when mothers lived in areas of heavy traffic. Women breathing exhaust fumes during pregnancy gave birth to children with higher rates of paediatric leukaemia, kidney cancer, eye tumours and malignancies in the ovaries and testes. Infant death rates increased in line with pollution levels, as did heart malformations. And those breathing dirtier air in childhood exhibited significantly higher rates of self-harm in adulthood, with an increase of just five micrograms of small particulates a day associated, in 1.4 million people in Denmark, with a 42 per cent rise in violence towards oneself. Depression in teenagers quadruples; suicide becomes more common too.

Stock market returns are lower on days with higher air pollution, a study found this year. Surgical outcomes are worse. Crime goes up with increased particulate concentrations, especially violent crime: a 10 per cent reduction in pollution, researchers at Colorado State University found, could reduce the cost of crime in the US by $1.4 billion a year. When there’s more smog in the air, chess players make more mistakes, and bigger ones. Politicians speak more simplistically, and baseball umpires make more bad calls.

As a report from Michael Greenstone and Christa Hasenkopf puts it, air pollution might very well be the single greatest external threat to human health on the planet right now. And to say that the market alone has failed to adequately curb the problem would be an understatement, to say the least. Luckily, this is an area where we know definitively that government regulation can and does work. The US, despite all its environmentalist shortcomings, has repeatedly shown itself capable of effectively fighting pollution via government regulation, and has achieved a genuinely superior level of air quality compared to countries like India and China, which are currently bearing the brunt of air pollution’s adverse effects. (As Wallace-Wells notes, “the average inhabitant of Delhi would live 9.7 years longer were it not for air pollution.”) Wallace-Wells continues:

That everything is worse in the presence of pollution means that everything should be better in its absence. And, as best we can tell, it is. According to the National Resources Defence Council, the US Clean Air Act of 1970 is still saving 370,000 American lives every year – more than would have been saved [in 2020] had the [COVID-19] pandemic never arrived. According to the NRDC, a single piece of legislation delivers annual economic benefits of more than $3 trillion, 32 times the cost of enacting it – benefits distributed disproportionately to the poor and marginalised.

And the effects of the US’s regulatory success in this area are especially evident when it comes to things like lead pollution, as Haidt explains:

As automobile ownership skyrocketed in the 1950s and 1960s, so did the tonnage of lead being blown out of American tailpipes and into the atmosphere—200,000 tons of lead a year by 1973. (Gasoline refiners had been adding lead since the 1930s to increase the efficiency of the refining process.) Despite evidence that the rising tonnage of lead was making its way into the lungs, bloodstreams, and brains of Americans and was retarding the neural development of millions of children, the chemical industry had been able to block all efforts to ban lead additives from gasoline for decades. It was a classic case of corporate superorganisms using all methods of leverage to preserve their ability to pass a deadly externality on to the public.

The Carter administration began a partial phaseout of leaded gasoline, but it was nearly reversed when Ronald Reagan crippled the Environmental Protection Agency’s ability to draft new regulations or enforce old ones. A bipartisan group of congressmen stood up for children and against the chemical industry, and by the 1990s lead had been completely removed from gasoline. This simple public health intervention worked miracles: lead levels in children’s blood dropped in lockstep with declining levels of lead in gasoline, and the decline has been credited with some of the rise in IQ that has been measured in recent decades.

Even more amazingly, several studies have demonstrated that the phaseout, which began in the late 1970s, may have been responsible for up to half of the extraordinary and otherwise unexplained drop in crime that occurred in the 1990s. Tens of millions of children, particularly poor children in big cities, had grown up with high levels of lead, which interfered with their neural development from the 1950s until the late 1970s. The boys in this group went on to cause the giant surge of criminality that terrified America—and drove it to the right—from the 1960s until the early 1990s. These young men were eventually replaced by a new generation of young men with unleaded brains (and therefore better impulse control), which seems to be part of the reason the crime rate plummeted.

From a Durkheimian utilitarian perspective, it is hard to imagine a better case for government intervention to solve a national health problem. This one regulation saved vast quantities of lives, IQ points, money, and moral capital all at the same time. [Footnote: “It is true that producing gasoline without lead raises its cost. But Reyes 2007 calculated that the cost of removing lead from gasoline is ‘approximately twenty times smaller than the full value including quality of life of the crime reductions.’ That calculation does not include lives saved and other direct health benefits of lead reductions.”] And lead is far from the only environmental hazard that disrupts neural development. When young children are exposed to PCBs (polychlorinated biphenyls), organophosphates (used in some pesticides), and methyl mercury (a by-product of burning coal), it lowers their IQ and raises their risk of ADHD (attention deficit hyperactivity disorder). Given these brain disruptions, future studies are likely to find a link to violence and crime as well. Rather than building more prisons, the cheapest (and most humane) way to fight crime may be to give more money and authority to the Environmental Protection Agency.

When conservatives object that liberal efforts to intervene in markets or engage in “social engineering” always have unintended consequences, they should note that sometimes those consequences are positive. When conservatives say that markets offer better solutions than do regulations, let them step forward and explain their plan to eliminate the dangerous and unfair externalities generated by many markets.

Pollution is just one of many areas in which government regulation can make a real positive difference. In the same way that we can point to the successes of government regulation in the environmental realm, so too can we point to equivalent successes in the realms of consumer product safety, financial markets, and more. Granted, the government can’t always be expected to do a perfect job of determining exactly what the perfect amount of regulation should be for any given situation. For better or worse, there will always be some degree of trial and error involved, just as in every other area of human activity. And in the cases where it turns out that the government has overreached and is doing more harm than good, it’s important to be able to identify the issue quickly so the counterproductive regulations can be rolled back. That being said, it’s equally important to be able to identify instances in which, as it turns out, government regulation hasn’t gone far enough – because otherwise, if things like negative externalities and information asymmetries are simply allowed to proliferate unabated, it can lead to disasters that impose massive costs, both in terms of dollars and in terms of lives and well-being.

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