Wednesday, August 11, 2010

Sorry, Kid: No License, No Lemonade

New York Times article "Sorry, Kid: No License, No Lemonade" (August 6th, 2010) offers a concise display of the deeper, recurrent misunderstanding of economics the Times represents. The article discusses a child's lemonade stand shut down by County health inspectors.

Julie Murphy, a 7-year-old Oregonian, set up a lemonade stand on July 29 at an art fair in northeast Portland. County health inspectors shut her down, however, telling Julie and her mother, Maria Fife, that they needed a temporary restaurant license, which costs $120. The penalty for selling food without a permit, they warned, was $500.

Discussing this degree of regulation, the Times only gives an open-ended, if suggestive, quote.

The Health Department employees were doing their jobs, he said, and “there’s a reason those laws exist,” but “a 7-year-old selling lemonade isn’t the same as a grown-up selling burritos out of a cart.” As for the health inspectors, Mr. Cogen said he had “engaged them in a conversation” about professional discretion.

There are indeed reasons that such regulations exist, but they aren't the safety of the public. Health regulations that involve heavy lump-sum taxation are inevitably supported and enhanced, if not created, by business interests, rather than consumers. The New York Times, as a liberal flagship, offers the standard idea: organized government protects non-organized consumers from organized business interests. The Stiglerian economic analysis offers instead: organized government and organized business combine to fleece non-organized consumers through the destruction of competitive forces. Indeed, even regulatory agencies that may have been created in response to market failures are subject to "regulatory capture," eventually corrupting the very organizations intended to "police" them.

The manner in which such lump-sum regulations impact a market with quantity is displayed graphically below (click to enlarge). With fixed-price heterogeneity and increasing marginal cost of production. As we can see, the quantity provided is reduced and price is increased. Both consumers and businesses are hurt, as their surplus is reduced.

This is not necessarily the end of the story. Product quality may be endogenous, chosen along a spectrum of production price-quality combinations. Instead of a supply-and-demand analysis, we might look at quality being distorted rather than quantity, with similar utility impact. The distortion is the focus, rather than its dimension.

We might add that the "professional discretion" Mr. Cogen refers to is the source of the sort of corruption Corrections is referring to. To extend a quote of Gary Becker's to one of our own, discretionary power is the most corruptive sort of government power.

Corrections thinks the lesson to be learned is that, as a rule, whatever power created by a government for whatever reason will inevitably be used to destroy competition and harm consumers in the long run. The only stable source of benefit to consumers is through competition, not government regulation, which inevitably destroys competition.

1 comment:

  1. It is a lot easier to maintain a monopoly or irrationally high profits when you have government on your side than when you have to face the withering competition generated by any market with outsized margins. Corrections is right on target.