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Does Government Regulations Hurt Business?

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The Good and Bad of Government Regulation

What is the proper role of government in a free enterprise system? Should government step aside entirely and let the winner take all in a no-holds-barred marketplace? Or, is there a place for limited government regulation?

Government intervention has positives and negatives. Depending on the type of business you are in the rules that regulate commerce will play different roles in your company. Whether unwelcomed or embraced, the number and cost to business of these federal regulations are key to maintaining a basic level of order and profitability in our marketplace. All businesses must make a profit to be viable. Even Not-for-profit corporations must make a profit in order to have an ability to grow. Not-for-profits just report their income differently than for profit businesses.

Government over regulations often increase costs for businesses, which can hurt their ability to compete. For example, current regulations require car manufacturers to include safety equipment, like seat belts, in all of their models. The mandatory equipment adds to the cost of the car. For small businesses, even a slight increase in costs can make a big difference in profits.

The overall numbers can be large. In fact, Congress requires the federal Office of Management and Budget (OMB) to report on estimated benefits and costs of complying with major federal regulations. The 2012 report, compiled by the OMB, makes several estimated observations which may or may not be accurate:

  • Estimated annual benefits of major Federal regulations that the OMB studied from 2001 to 2011 range from $141 billion to $691 billion.
  • Estimated annual costs for the same regulations over that time period range from $42.4 billion to $66.3 billion.

Government regulation can also prevent businesses from entering new markets. Licensing regulations, for example, dictate who can set up shop as a beauty salon or a massage therapist and who cannot.

In addition to raising costs and regulating where you can conduct business, regulations can discourage innovation. State and federal regulations control the quality of many products, like food, drugs and insurance. Someone with a good idea may not be able to create a new business because complying with the regulations for the product is too expensive.

On the other hand, some government regulations are meant to provide a balance for all businesses. Like a referee, the regulations can discourage cheating. For example, the federal government sets standards for “truth in advertising.” These standards are meant to encourage fair competition and discourage consumer fraud.

Protecting Shared Resources

Government regulations can help businesses get fair access to shared resources. Fishing is a good example. Many fishing businesses depend on access to wild fish, yet wild fish are a shared resource.

Shared resources can face what author Garrett Hardin calls the “tragedy of the commons.” Long ago in England, farming villages often shared a pasture called the “village commons.” Anyone from the village could let his sheep or cows graze there for free and because the pasture was free farmers often brought more and more animals to graze there. Eventually there would be too many animals, all the grass would disappear and stop growing. Yet, individual farmers had little incentive to limit their use of the shared pasture until the pasture was ruined.

Limited government regulation can help businesses by regulating how much of the shared resource any one competitor can take. However, over regulation stifles economies, slows GDP, and lowers tax revenues, among other things. Research has shown that fewer regulations do lead to greater tax revenues being generated, because the cost of doing and starting new business are lower giving people more freedom to take a risk, to become business owners.

Citizens need to take care of how much and what kind of balance their elected representatives allow by being an involved citizenry in the acts of their government. Your vote really does matter. You choose and design the kind of freedom and life you want for you and your family, one vote at a time.

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