AVAST ARRAY of consumer protection requirements mandate licenses, certifications, inspections, and the like for the businesses that sell us goods and services. Those regulations may once have made sense but — thanks to the Internet — increasingly they do not. It’s time for them to go.
Barbers, manicurists, and cosmetologists have to be licensed. So do plumbers and roofers. Restaurants are inspected. Lawyers have to pass a bar exam. Real estate appraisers must be registered. Taxicabs have medallions. The list goes on and on, touching on almost every facet of our daily economic lives. And, for the most part, all these requirements are an enormous waste.
They don’t provide consumers with much in the way of protection. And they come at a considerable cost. There’s the cost of the governmental inspection regime, of course, as well as the fees that businesses have to pay to pass muster. But there’s a hidden, less apparent cost as well. Licensing requirements limit competition, stifle innovation, and raise prices. Rather than helping consumers, they hurt them. Indeed, that’s why it’s often businesses themselves that are the loudest supporters of government regulation: They like them because they’re protectionist.
Examples are easy to find. Taxi regulations in most cities sharply limit the number of cabs. Prices are higher than they should be, service is poor, and the availability of a cab is spotty. As documented in the Globe’s recent Spotlight series on the industry, the beneficiaries of all of this are the owners of medallions; the drivers who do the work are treated poorly — brutally, even. Then too, the regulatory regime resists change. Although some enlightened officials in Boston have welcomed new entrants such as Uber and Hailo (both smartphone apps that connect passengers to drivers), the industry (not surprisingly) doesn’t want competition, and collaborates with its own regulators to stifle it. That’s what happened in Cambridge, for instance, which last year sued to shut down Uber.
Anyone who has taken an introduction to economics course remembers the theoretical discussions of supply and demand and how, in an optimal world, markets would function perfectly, delivering high value and low prices to consumers. The real-world objection, however, is that information is imperfect. Sellers of goods and services can lie and cheat; they can sell or deliver substandard goods and services, fooling too many and sometimes hurting them in the process. “Caveat emptor” (“buyer beware” ) put too much of a burden on consumers to figure out which sellers are good and which are bad. Government intervention, it seemed, was needed. Otherwise, it was feared, without health inspections, restaurants would become filthy. Without bar exams, incompetents would be practicing law. Without licenses for hairdressers, we’d all be having bad hair days.
Of course, with health inspections occurring infrequently, there’s little guarantee that kitchens are always clean. Inept lawyers are easy to find. And most of us have tales of disastrous haircuts that ruined our day. In other words, the protections all these regulations give us are, at best, weak.
But more to the point, the conditions that gave rise to the need for government intervention have changed, brought about largely by the Internet and the explosion of information now available to almost anyone. Consumers review and rate almost every buying experience they have, posting them on general review sites, such as Yelp or Epinions, as well as on more specialized venues, such as Amazon or OpenTable. Thus, if a restaurant serves a bad meal, it’s probably not the health inspectors who will catch it. Rather, it’s customers, who will report any sign of vermin, hair in the food, or illness suffered. Other potential customers then read those reports and react accordingly, withholding their business.
This is true of more than restaurants. Indeed, businesspeople now live in near terror of those reviews, quickly fixing issues that arise, making amends with offended clients and doing whatever they can to improve customer satisfaction.
Instead of regulation by the government, we now have regulation by the masses — ever present and ever watchful. What the Internet is creating is the kind of optimal economic world that economists once dreamed of. And in that world, where each of us is a regulator, the government is irrelevant.