” Regulation creates a moral hazard.”

P. J. O’Rourke, Comedian

The Pros & Cons of Regulation

advantages and disadvantages of government regulation

Regulations can be defined as the management and organization of systems in line with a set of rules. There are regulations out there for all parts of our daily life.

Moreover, regulations are also present in business and in all kinds of political systems. Although regulations can make a lot of sense, they can also imply some problems.

In this article, the pros and cons of regulations are examined.

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Advantages of Regulation

  1. Better working conditions
  2. Protection of human rights
  3. Avoidance of business monopolies
  4. Assurance of tax revenue
  5. Safety improvements
  6. Crucial for the energy transition process
  7. Working transportation systems
  8. Assurance of minimum qualification levels
  9. May provide social security for the poorest among us
  10. Health improvements for the general public
  11. Important for a sophisticated economic framework
  12. Environmental benefits of regulations
  13. Holding people accountable for their actions

Better working conditions

One important advantage of regulations is that they can lead to better working conditions for employees. In many countries, there are strict regulations in place that determine how many hours an employee is allowed to work at the maximum.

Moreover, there are also plenty of regulations in place that aim to protect workers from dangers or unhealthy work environments.

Thus, in countries with strict regulatory practices, chances are that the working conditions of employees are much better compared to countries where such regulations do not exist, since people are often exploited in those countries with lax regulatory standards.

Protection of human rights

Regulations also aim to protect all kinds of human rights. For instance, there are regulations in place that try to prevent the social isolation of minorities.

Moreover, regulations also aim to assure a minimum level of education for everyone of us so that as many people as possible get a fair chance to succeed in life.

Avoidance of business monopolies

Regulations are also crucial in the business world. If companies get too big, they often have far too much market power and can dictate the prices in the respective industry, which is quite harmful to customers since prices tend to increase due to the formation of monopolies.

Moreover, monopolies or markets that are controlled by only a few big firms are not only harmful to consumers, but also for other firms which try to compete against those big players, but will likely not be able to stay in business in the long run.

Additionally, financial regulations may also prevent monopolies to form in the banking industry.

Assurance of tax revenue

Another benefit of government regulation is that they can assure the tax revenue for the respective country. For instance, without tax regulations, companies and also private persons would not pay taxes at all since they would simply not be forced to do so. However, without tax income, crucial infrastructure projects couldn’t be carried out, which would significantly harm the general public.

Thus, in order to assure a sufficient amount of tax revenue, it is crucial that governments around the world impose strict regulations and laws in order to prevent tax avoidance.

Safety improvements

Regulations are also meant to improve the overall safety level in all parts of our daily life. For instance, there might be regulations in place that buildings are only frequented by a limited number of people so that they are not at risk to collapse.

Moreover, there are also many rules and regulations in case there will be natural disasters like earthquakes or serious storms in place in order to protect the general public.

Thus, regulations can vastly improve our overall safety levels and therefore also give us a good feeling since we know that we will be covered against many adverse events that might happen to us.

Crucial for the energy transition process

The transition from fossil fuels to renewable energies is crucial in order to slow down global warming and to reduce all kinds of pollution. In order to successfully transit to green energies, governments around the world have to set strict regulations and give firms an incentive to invest in those green technologies.

Only then will companies have the incentive to move away from fossil fuels, which is crucial in order to assure a green energy mix in the future.

Moreover, governments can also introduce regulations that give private homeowners the incentive to install solar panels or home wind turbines.

This would further support the transition process away from fossil fuels and towards alternative energies.

Working transportation systems

Regulations also assure that our transportation systems work properly. For instance, municipalities have to set rules related to the schedule of public transport systems.

Moreover, most of our food and other things for our daily life are transported over quite long distances and there have to be rules and regulations in place in order to assure that those items will be available in our stores quite soon.

Additionally, governments may also prevent the import of certain goods that may harm the health of the general public since it may contain harmful bacteria or viruses.

The same is true for the import of illegal substances which may also be prevented by introducing appropriate laws and regulations.

Assurance of minimum qualification levels

For certain professions, it is crucial that experts in those fields have a high level of qualification. For instance, doctors need high qualification levels in order to be able to treat patients properly and to minimize mistakes that could potentially lead to the deaths of people.

Thus, for some jobs, especially for professions which could do serious harm to people, it is crucial that there are strict regulations in place that prevent people with low qualification levels to enter and practice in those markets.

May provide social security for the poorest among us

Another upside of regulations is that they can also provide the poorest among us with a minimum level of social security.

For instance, in many countries, if a person becomes unemployed, the government will provide this person with money so that he or she will be able to pay their rent instead of becoming homeless.

Thus, regulations related to social security can significantly support people in difficult periods of their life.

Health improvements for the general public

Strict regulations can also improve the overall health levels of the general public. For instance, governments all over the world try to regulate the food market in order to protect people from the adverse health effects certain products could imply.

A prominent example is the market for food supplements. Although many firms claim that their products are healthy, many of them may have serious side effects and governments and regulatory authorities have to decide whether those supplements are actually safe or not before making them available for the general public.

Important for a sophisticated economic framework

The rules and regulations authorities put in place play a crucial role for the local economy. If there are sophisticated regulations in place, firms may be able to efficiently operate and make high profits.

However, if regulations are too strict, companies may no longer be able to survive in a fierce global market and may therefore be forced to go out of business at one point in time.

Thus, although regulations are crucial for an economy to work properly, too much of it could also pose serious problems.

Environmental benefits of regulations

There are also many environmental benefits that can come along with strict regulations. For instance, governments can introduce regulations that limit the amount of greenhouse gases that are emitted into our atmosphere, which would slow down global warming to a certain extent.

Moreover, governments could also set maximum pollution levels, which would further benefit our environment in various different ways.

Holding people accountable for their actions

Through the introduction of all sorts of regulations, people are also held accountable for their actions. For instance, if you park your car in the wrong spot, you may get fined.

If you drive too fast, you will have to pay for it as well in case you get caught. All those measures are in place to discourage people from actions that may harm the general public and to hold people accountable for their actions.

Without those regulations, chances are that everyone would just do what he or she wants to do without taking into account the negative effects on others.

Disadvantages of Government Regulation

  1. Can be time-consuming
  2. Large amounts of administrative work
  3. Plenty of controls necessary
  4. Small businesses may suffer the most
  5. Regulation can be costly
  6. Flawed regulations may do more harm than good
  7. Innovations and technological progress may be slowed down
  8. High levels of regulations may hurt competitiveness of a country
  9. Regulations are vulnerable to lobbying activities
  10. Overall level of freedom may suffer
  11. People may not tolerate certain regulations
  12. Depend on the preferences of politicians
  13. Penalties may be subject to high level of discretion

Can be time-consuming

Although regulations are important due to various reasons that we have analyzed before, there are also some problems implied by regulatory frameworks. One downside of regulations is that compliance with those rules can be quite time-consuming.

For example, every time a new regulation is introduced, companies in the respective industry have to adjust their production or distribution.

Depending on the regulatory action, this can be quite time-consuming in some cases, especially if whole production chains are affected.

Large amounts of administrative work

Regulations can also vastly increase the amount of administrative work for companies. For instance, in order to comply with certain accounting standards, companies have to archive their bills for a quite long time while ensuring the safety of customer information at the same time.

Especially for small to medium-sized companies, the administrative work that has to be done due to regulations may be overwhelming and many of those companies may have to spend plenty of money in order to be compliant with those rules.

Plenty of controls necessary

The compliance with regulations will only be assured if there is a high level of control in place so that companies will have to fear being caught in case they do not comply with those regulations.

Moreover, this also implies strict fines for companies that violate those rules in order to increase the incentive for companies to take those regulations seriously. However, in order to carry out those controls, plenty of taxpayers’ money has to be spent to hire enough workers.

Small businesses may suffer the most

Another problem with regulations is that they are often most harmful to small businesses. The smaller the business, the higher will be the fraction of regulatory work compared to the actual work that leads to profits for a company.

For instance, imagine you have a small store and the accounting work and other regulatory stuff will require you to spend plenty of time on it every week.

Chances are that this time will be missing for your actual business operations and you may not be able to stay competitive in the long run since you have to spend too much time in order to comply with the regulatory frameworks.

Regulation can be costly

Regulations of all sorts also always imply a certain level of costs. Regulations increase the costs for companies since they have to assure compliance with those regulatory standards.

Regulatory standards increase the costs for the government since authorities have to implement proper control mechanisms.

Finally, the implementation of regulations also implies certain welfare costs, since free market forces will not be able to work properly anymore.

Flawed regulations may do more harm than good

In order to assure positive overall effects of regulations, it is crucial that those regulations are designed in a thoughtful manner. However, many regulations are introduced by people who actually do not know what they are doing and the outcomes are often pretty poor.

Thus, in many cases, regulations may even do more harm than good, especially if they are introduced by people with insufficient knowledge in a certain field.

Innovations and technological progress may be slowed down

Government regulations also often imply the risk to slow down technological progress and innovations. For instance, if the regulatory standards in a certain research area are too strict, companies may refrain from investing money in those fields.

However, with insufficient money spent on R&D, chances are that our overall technological progress may suffer. In turn, since technological progress is crucial to solve our environmental problems, a lack of innovations may significantly hurt our planet and our quality of life in the long run on a global scale.

High levels of regulations may hurt competitiveness of a country

If there is are strict regulations in place in one country while there are only lax regulations in other countries, chances are that companies in countries with strict regulations may not be able to stay competitive in the long run since the development of products and the approval processes may take quite long while it may be quite easy to develop and get permissions to sell products in countries with lax regulatory standards.

Thus, if regulatory standards are quite different across countries, too strict regulatory standards may vastly hurt companies due to the fierce global competition.

Regulations are vulnerable to lobbying activities

Lobbying can also be a significant problem when it comes to the introduction of regulatory frameworks. Big companies often try to influence political decisions in their favor in order to maximize their profits.

Thus, if the power of lobbyists is too strong, chances are that the regulatory standards are biased in a way that they rather benefit those big corporations instead of the general public.

Overall level of freedom may suffer

Opponents of regulations often also claim that the overall level of freedom may suffer due to the introduction of strict regulatory frameworks.

Our freedom is a precious good and confining our freedom may only be justified in a quite limited number of occasions.

Especially for people who love their freedom, too strict regulations may vastly decrease their quality of life.

People may not tolerate certain regulations

People may also protest against certain regulations, especially if it is clear that those regulations will not benefit the general public, but rather only a small interest group in the corporate sector.

Thus, some regulations may not be tolerated by the general public and serious conflicts may develop due to the introduction of unfair regulatory frameworks.

Depend on the preferences of politicians

Regulations are also often biased in the direction of the preferences of politicians. For instance, if a quite conservative politician introduces a regulation, it may look much different compared to a state where a socialist politician introduces a regulation.

Thus, the personal preference of politicians can vastly influence the design of those regulations and may not always be in line with the majority of the general public.

Penalties may be subject to high level of discretion

Not only the regulations will be subject to a high level of discretion, also the fines for violations against those regulations will be subject to the preferences of politicians or certain interest groups and may not be considered to be fair in many cases.

Top 10 Regulation Pros & Cons – Summary List

Regulation ProsRegulation Cons
Improvements in working conditionsCan be time-consuming
Positive overall health effectsAdministrative costs
Protection of the general publicPlenty of controls necessary
Avoidance of monopoliesSmall companies may be in trouble
Assurance of sufficient tax revenueMay hurt competitiveness of firms
Social securityFlawed regulations may hurt the public
Important for the economic stabilityLobbying is a problem
Government regulations may benefit our planetRegulation can be costly
Minimum qualification levelsDependence on the mood of politicians
Accountability of peoplePenalties are subject to high levels of discretion

Conclusion

There is no doubt that regulations are quite important in order to assure a high quality of life. However, there are also many problems associated with regulatory frameworks.

Thus, it is crucial that politicians design those regulatory frameworks in order to assure a maximum level of benefits for the general public while minimizing the negative effects of those regulations at the same time.

Sources

https://www.investopedia.com/articles/economics/11/government-regulations.asp

https://en.wikipedia.org/wiki/Regulation

https://www.britannica.com/topic/regulation

About the author

My name is Andreas and my mission is to educate people of all ages about our environmental problems and how everyone can make a contribution to mitigate these issues.

As I went to university and got my Master’s degree in Economics, I did plenty of research in the field of Development Economics.

After finishing university, I traveled around the world. From this time on, I wanted to make a contribution to ensure a livable future for the next generations in every part of our beautiful planet.

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