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Who Pays For Expanding Regulation?

Executive summary of this post:

• The cost of complying with government regulations is always passed on to consumers.

• A majority of consumers want to pay for more government regulation–we know because they vote for politicians who promise expanded regulations all the time.

• Trying to lower the cost of your product by not complying with regulations may result in criminal sanctions.

Conclusion:

• You should pay for the cost of complying with government rules and pass those costs on to your customers.

Details:

In my last post I showed why you should think of all the government rules and regulations as merely a formed of forced insurance. The costs to comply with those rules are the premium payments. The question I assumed you would ask is, “Who pays those insurance premiums, or who bears the cost of compliance with government rules?” I said consumers do. Here’s why.

Politicians tell everyone that businesses pay compliance costs out of their profits. But of course (nearly) everyone realizes that is a lie: Businesses don’t pay costs out of profit; profit is always an extra charge to consumers on top of all costs. And no business can stay in business for long unless it recoups all the costs to bring its product to consumers. So in the long run, consumers pay the every component of the cost of everything they buy, even the cost of regulations.

Not only is cost of complying with government rules merely another cost borne by consumers, but in fact a majority of consumers actually want to pay those extra costs. We know that is true, because consumers are the ones who vote for the politicians who add the costs of compliance!

Of course every business tries to reduce its costs of bringing its product to consumers. That’s because if you can reduce your costs below that of your competitors while still charging the same as your competitors, you will realize more profit than your competitors. It is exactly that incentive (the “profit motive”) that works to drive down the costs for almost every product, making more wealth for society.

To achieve cost reduction, small companies try all sorts of activities: Lower rent by moving to less desirable locations, like working in your garage; use cheaper materials or hire people who are willing to work for lower pay; don’t pay health insurance for employees; don’t pay professionals to do things like tax preparation and legal work.

Some small companies inclined to extreme cost cutting will operate without liability insurance to save the cost of those premiums. In effect, the owners of those companies are self-insuring. They presume that by being careful–very careful–they will not harm anyone, and even if some few consumers are harmed by their product, the cost of compensating those victims will be less than the cost of insurance premiums. These business owners judge the risk of not being able to pay such victims, and therefore having to declare bankruptcy, to be so low that they will not worry about it. In effect, they’re betting that they will not “get caught” without liability insurance.

Well, I’ve already convinced you that the cost of complying with government rules is just another type of insurance premium. So in your efforts to wring every last bit of cost out of bringing your product to consumers, should you seriously consider avoiding the costs of government-mandated rule compliance?

In some cases the politicians have been smart enough to foresee the very real possibility that some business owners will want to “self insure” by not complying with the government-mandated rules. So some rules carry the threat of a criminal penalty for failure to comply. In effect, the government raised the stakes of your betting that you will not “get caught” without compliance.

The only conclusion you can draw from the tide of increased regulation is that most consumers want to pay higher prices to cover the cost of regulatory compliance. So you should oblige them and raise your prices high enough to cover those expenses and still make the profit you want. To do otherwise unjustifiably puts your own personal freedom at risk of criminal prosecution.

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