Regressive Effects of Regulation

December 3, 2012

The economy is littered with health and safety regulations that affect nearly every aspect of life. Several risks are regulated in various fields ranging from air and auto travel to food and drugs. However, many risks that are subjected to regulation are often negligible and do nothing more than impose higher costs on consumers, says Diana Thomas, an associate professor of economics at the Jon Huntsman School of Business at Utah State University.

Low-income households are disproportionately affected by these regulations since they have little to no extra money to spend on higher costs imposed by the regulations. More importantly, these regulations have redistributive effects, which shift wealth from the poor to the middle class and the rich.

  • Regulations tend to drive up the price of many goods and lower wages of workers in regulated industries.
  • Because of this, low-income households have less disposable income to spend on mitigating risks they may more commonly face.
  • As a result, rich and middle income families benefit because they don't have to pay as much out of pocket to mitigate risks they face more commonly.

A lot of health and safety regulations are for low-risk hazards but end up incurring extremely high costs that could be done cheaper by individuals using their own income.

Low-income households are also affected by the fact that industries respond to regulations by increasing the prices of their goods and services. Price hikes on inelastic goods, such as gasoline, will likely be imposed completely on consumers. This hurts lower-income families since they have less disposable income to spend on energy.

Considering that fewer people benefit from the regulations than those that pay into them, it's important to look at the cost effectiveness of different regulations.

  • For example, the cost of environmental regulation is $4,200,000 per life.
  • In a study of 36 different regulations, the total reduction in risk of a fatality of 1 in 10,000 of population costs around $3,359 per household.
  • However, private risk reduction costs about $645.16 for a mortality risk reduction of 1 in 10,000 people.

Source: Diana Thomas, "Regressive Effects of Regulation," Mercatus Center, November 2012.

 

Browse more articles on Government Issues