The pitfalls of over-regulation: Incentives, schemes, and unintended consequences

Regulations and rules can be beneficial if they protect equal rights, but when they go beyond reasonability, problems arise. Over-regulation often leads to unintended consequences, as exemplified by a boarding school dean’s attempt to enforce a strict food consumption rule. Instead of achieving the intended goal, the regulation created incentives for students to find ways around it. Similarly, historical examples like alcohol Prohibition in the United States demonstrate that over-regulation fosters the growth of organised crime and encourages individuals to seek alternatives. The adoption of new tobacco and vaping regulations in South Africa is likely to follow the same path. Over-regulation, rather than solving problems, often creates costly and challenging circumstances.

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Rather than improve society, over-regulation makes life more expensive and difficult

By James Peron

Regulations and rules are not necessarily bad things; it all depends on what they do and how they are enforced. The problem is the political class and their bureaucrats tend to go well beyond the realm of reasonability.

Ultimately, the question a free society should be asking is: Does the regulation protect the equal rights of people or does it violate those rights? For instance, while a liberal society assumes individual liberty is a right, that liberty always ends where the rights of others begin.

If you want to take a nap, that’s no one’s business but your own, unless you think you have the liberty to use someone else’s bed without permission.

You ought to be free to drive from Pretoria to Cape Town, provided you haven’t stolen the car you’re driving.

In general, laws and regulations that protect rights are popular with most people—albeit unpopular with those looking to violate rights.

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The truly illiberal use of such laws and regulations comes when the government decides to protect you from yourself, or in areas where it favours the privileges of some over the rights of others. This latter kind of regulation is quite popular with fake capitalists who use government power to skew markets in their favour. That isn’t a free market by any means, but the regulatory state at its worst.

In every regulatory endeavour, the regulations themselves create incentives to get around the manipulation of the market by the crony capitalists and their political allies.

I well remember the first time I was aware of how this works back when, as a child, I was attending a boy’s boarding school. The school dean was a real authoritarian who loved having power, especially the ability to make up new rules on the spot.

One problem for us students was that sometimes the food was truly horrific. The dean made it known that every boy had to eat everything that he was given whether he liked it or not. To enforce this regulation, he would stand at the entrance to where each boy had to take his tray and plate for washing and would inspect their plates to see if they ate to his satisfaction, as opposed to their own satisfaction.

If a boy still had items on his plate, he was sent back to eat it cold. Like many examples of regulation what this did was give 240 boys incentives to find ways around the regulation and its enforcement. They didn’t know the finer points of economics, but they acted as if they did.

Some realised the pitcher of soup on each table didn’t go through the inspection, so chunks of truly awful liver would find their way to the bottom of the pitcher where it was out of sight. With eight boys per table, that only worked for a lucky few. Sometimes it was something you could wrap in a napkin and hide in your pocket until near a trash can.

Some were lucky enough to have a dorm mate who actually liked the food, and the bartering would begin. Some would slip their friend a small amount of change, or promise him their dessert if he ate the food they (literally) couldn’t stomach. There was a candy the commissary sold that sometimes had cardboard coins that could be used to buy more treats. These would also be used to pay boys to eat the unappetising meals.

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In the end, the dean felt proud because so many plates were coming in clean. But all he actually managed to do was divert the offensive food from one location to another.

His justification for the rule was this food “is good for the boys,” but the regulation didn’t actually get them to consume the food. It just redirected who ate it or where it was hidden. The boys who didn’t mind the awful food were a bit better off by the deals, but the bulk of the boys were worse off.

This is one of the inherent problems in over-regulation. It tends to not accomplish the goal of the rules, but instead redirects things unfairly and wastefully.

Consider the absurd experiment in the United States with alcohol Prohibition. It was justified to protect the family—a favourite appeal of authoritarians of all stripes. But in spite of the law, alcohol remained available across the country.

Some things did change, but not for the better. For instance, the local liquor establishment might be put out of business, but gangsters and other violent criminals quickly replaced it. Prohibition created organised crime in America. In addition, a lot of home brews were being sold under the table—sometimes with ill effects not found in the commercial product.

Over night, millions of people were handed an incentive to find ways around the regulations—and they did. The same thing will happen when the South African Parliament adopts the new tobacco and vaping regulations it is presently considering.

And the same thing happened when I was in grade school. The dean didn’t create demand for awful food, he just incentivised schemes to get around the rules. Over-regulation always creates an incentive around the rules, and there are more people looking for the escape hatch than for a way to enforce the rules. Ultimately, over-regulation just makes life more costly and difficult.