Government Regulates and So Does the Market

Many people assume that we need government regulations to keep businesses from taking advantage of us. On the other hand, some argue that we don’t need regulations at all. The truth is that many regulations can and do exist apart from government. They also arise on their own from voluntary interactions in society.

Market incentives include a strong tendency to self-regulation. Businesses seek to make profit, but in a competitive marketplace they can only do so by making their product one which consumers want to purchase. One important aspect of this is reputation. Businesses need to foster and maintain a good reputation for their products, otherwise they risk losing their customers to another business that does a better job. In this way, businesses which provide quality products to society are rewarded with a good reputation and get more business, whereas businesses that fail to provide quality products are punished by earning a poor reputation and losing business, sometimes leading to bankruptcy. In other words, it is in the businesses’ self-interest to create products that benefit their customers, not upset them.

But it often isn’t easy for consumers to determine the quality of a product by themselves, and some items are purchased infrequently or from a company that is unfamiliar to a customer. Do market forces provide any remedy to the problem of infrequent interactions with producers? You may be surprised to find that the answer isn’t theoretical, even with the amount of government regulations currently in place. A company named Underwriters Laboratories has been providing this exact service for over a century. They test thousands of new products annually, conduct numerous safety inspection visits, and if the products are deemed safe then they are given the UL logo. Look at the appliances in your home and you are likely to see several. According to the company, in 2010:

  • 23 billion UL Marks appeared on products
  • 66,932 manufacturers produced UL certified products
  • 89,189 product evaluations were conducted by UL
  • 595,709 follow-up services inspection visits were conducted by UL
  • 19,722 types of products were evaluated by UL

Underwriters Laboratories isn’t the only group offering this type of service. The U.S. Green Building Council (USGBC) is a non-profit organization which runs the well known Leadership in Energy and Environmental Design (LEED) program. LEED creates a rating system to determine how ‘green’ a building is, and includes different standards for new or existing buildings, schools, homes, healthcare facilities, retail stores, and more. Many builders voluntarily follow the standards and receive a LEED certification because, just like with Underwriters Laboratory, they value a respected third party certifying their product. The LEED certification shows the power of the free market; if there are enough people who value green buildings then a mechanism such as LEED arises to satisfy that desire without any government action at all. If the government were to institute these standards, then those who don’t value green buildings would be forced to use the standards against their will.

The market naturally tends to self-regulate, and even apart from this fact there are groups such as Underwriters Laboratories, Consumer Reports, or LEED who provide that service intentionally (and very successfully). Since government regulations can result in unintended consequences that harm the economy and restrict our economic freedom, we must be sure that government does not intervene in the economy when the market is better able to handle the problem itself.

A version of this blog originally appeared on EconomicFreedom.org, a project of the Charles Koch Institute. The Institute republished it here on July 31, 2015.

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