No Perfect Solutions for Market Imperfections

Abstract

Markets are imperfect, and the suboptimal results are frequently used to justify government regulation. Government regulation, however, is also imperfect, and the suboptimal results are, less-frequently, used to justify deregulatory efforts. Located between those poles is industry self-regulation, in which the industry is tasked with effectuating regulatory goals. Unfortunately, but perhaps not surprisingly, industry self-regulation is also imperfect. Industry members, when called on to engage in self-regulation, will face what Austrian economists call the knowledge problem, but at lesser severity than full government regulation. Industry members will also face a variety of public choice pressures, and those pressures may be more disruptive than under full government regulation. There are, therefore, no perfect solutions, and policy makers seeking solutions must weigh the relative tradeoffs on a case-specific basis, if they wish to obtain optimal outcomes.

Keywords: Self-regulation, rent-seeking, knowledge problem, public choice, regulatory capture

JEL Classification: B53, D02, D43, D72, D73, D82, K23,