Imperfect markets don't mean that regulation is the answer; competition often does a better job than bureaucracy at improving outcomes.
In the last couple of generations, regulation has exploded, with harmful effects on both our freedom and the economy. One of the areas of regulation involve rules that are designed to protect consumers from being harmed by the products that they purchase. Yet, there is a strong argument that these regulations are largely unnecessary.
Free market advocates generally argue that much of this regulation is not needed – that the market will develop mechanisms for protecting consumers. The reputations of sellers and brand names provide strong incentives for sellers to provide safe and effective products. Moreover, private companies, such as consumer reports, can also test the products and sell the information to consumers.
But many people don’t trust the market to provide the requisite safety and information. Even assuming they are right, that does not mean that one needs regulation. The government could always provide for certification rather than licensing or approval of products. For example, the government could establish the same regulatory standards that it now does, but merely certify products that complied. It might require products that do not conform to the standards to contain a very visible mark that stated “Not Regulated.” Charles Murray advocated this system some years ago in his book, What it Means to be a Libertarian.
There are, moreover, additional advantages of this system that Murray did not mention. It also provides government with better incentives. When government regulates at present, it often has little incentive not to impose too strong a regulation, because all of the parties are required to follow the regulation. But under a certification system, the more stringent the regulation, the more costly to the relevant businesses and therefore they have less incentive to follow the certification.
Moreover, if a large percentage of the relevant businesses choose not to follow the government certification requirement – and the market continues to operate successfully – the government actions will become increasingly irrelevant. Consumers will come to ignore the “Not Regulated” mark, since it seems not to provide information about the quality of the product. Consumers in California have the same reaction of not paying attention to cancer warnings required by Proposition 65 for many businesses.
Thus, if the government seeks to avoid irrelevancy, it will have an incentive to adopt standards that are not too burdensome and close to what consumers would desire.