The previous chapter showed how government MANDATES can lower society's happiness by forcing firms to take resources that are higher valued elsewhere, in order to produce something that is lower valued--such as safety. In doing so, we accepted the notion that at least the government was successful in getting the market to produce additional safety. Now we want to demonstrate that the government may not be successful in getting additional safety produced, even when it mandates this outcome. The reason for this has to do with the UNINTENDED CONSEQUENCES of market interventions.

The Profit Table below represents the Revenues and Costs associated with a commercial laundry firm, before and after new regulations protecting the safety of laundry workers are mandated by OSHA. Specifically, the table reports how much money Bob Guthrie's Nichols Hills Cleaners made from his business with medical accounts.

Before the new rules, Bob Guthrie made a profit of $2,000 from this business. After the new rules, two things happened. First, Mr. Guthrie had to spend a total of $6,000 to come into compliance with the new regulations. Second, he was able to lower his wage costs by a $1,000. This latter result didn't happen immediately of course. But Mr. Guthrie found that workers appreciated working in a safer environment. This meant that his employees were less willing to quit and take jobs elsewhere, and that he didn't have to give as many raises to hold on to his good workers.

Unfortunately, the savings in labor costs were not enough to outweigh the costs of compliance. Bob Guthrie found that the total costs of his medical laundry business had increased from $8,000 to $13,000, resulting in negative profits. As a result--and as the article states--he discontinued his medical cleaning business. We know from our previous analysis that the effect of this mandate is to decrease society's happiness by diverting resources out of the medical cleaning business. But that's not what we want to focus on now. Instead, we want to investigate the overall impact of this mandate on the level of public health in society.

The combination of higher costs and fewer laundries willing to take medical cleaning business means that hospitals will have to pay higher prices to have their laundry washed. To compensate for these higher costs, hospitals will have to cut back on some of their medical services or charge higher prices to their patients. What do people usually do when the price of something goes up? They consume less of it. Economists are so sure of this last statement that this conclusion is awarded the prestigious title of being a law of human behavior. It is called the LAW OF DEMAND. When the price of gasoline goes up, people consume less gasoline. When the price of stringbeans go up, people consume fewer stringbeans. And when the price of health care goes up, people consume less health care.

To see this clearly, let's take an extreme example. Suppose the government piles on so many new safety regulations that the average cost of treating each patient rises to $1,000,000. Who would (or could) purchase health care at this price? Virtually no one. In this case, mandating excessive safety regulations clearly lowers the public's overall health. A bit unrealistic, you say. Sure. But it does highlight the problem: IF THE DECLINE IN PUBLIC HEALTH RESULTING FROM FEWER PEOPLE PURCHASING MEDICAL CARE OUTWEIGHS THE INCREASE IN PUBLIC HEALTH RESULTING FROM THE SAFETY MANDATES, THEN GOVERNMENT REGULATION DAMAGES PUBLIC HEALTH. And it would not be the only time that regulations to improve public health have had unintended consequences.

Consider the following real-life example. Until recently, the government has had strict regulations mandating the adoption of child-resistant safety caps on products such as aspirin, prescription drugs, etc. Now what to do you think the net impact on public safety has been as a result of this regulation? Consider the following conclusion by a highly regarded economist who has carefully studied this subject:

How can this be? It's not that difficult to figure out. As anybody knows who has ever struggled with a so-called "child-resistant" safety cap, they aren't very easy for adults to open either. How do some people choose to respond to this? Let's return to the law of demand. In essence, it is now more "costly" to open up a medicine bottle. When an action becomes more costly, people do it less frequently. One way to open up medicine bottles less frequently is to leave them open. That is, people don't put the tops back on. So children find more open medicine bottles to get into. The perverse result is that child-resistant safety caps have--on balance--made it easier, not harder, for children to get access to poisonous substances.

An isolated incident you say? Consider the effect of regulations governing the introduction of new drugs. The federal Food and Drug Administration places severe requirements on the ability of pharmaceutical firms to market new drugs. It takes an average of approximately three years and millions of dollars for a new drug to receive approval by the FDA.³ While the intensive testing required by the FDA no doubt reduces the number of harmful drugs available to consumers, it also has another effect. It reduces the number of beneficial drugs available to consumers. Many economists believe that the net effect of the FDA's tough approval process has been to harm more consumers than it has helped. This is how one advocate put it:

FDA regulations raise the cost of introducing new drugs. Not just ineffective or dangerous drugs, but good drugs as well.⁵ As a result, less drugs make it to market. But that's not the end of the story. Less drugs on the market can only mean one thing. Higher drug prices. When drug prices are higher, consumers will take fewer of them, which means that consumers will miss out on the health benefits of drugs that they would have taken in the absence of the FDA regulations. Once again, we are left with an unintended consequence: FDA regulation may lower the health of the very population that the agency is entrusted to protect.

So what's the problem with our government? Why these unintended consequences of well-intentioned regulations? Is it because government is filled with bungling idiots who either are too incompetent to know better or too insensitive to care? We don't think so. In our opinion, the fundamental problem here is one of INFORMATION.⁶

How much do consumers value child-resistant safety caps? How much happiness will consumers get from that new drug? Are they willing to forego other goods to get products that are safer? Or is the cost of the safety so high that consumers would rather do without the good if they are forced to pay for the extra safety? These are incredibly difficult questions to answer, but they are questions of life and death.

Note that the issue isn't whether to have safety or not. The issue is, how much safety? When government mandates safety standards, it is extremely difficult for consumers to signal their evaluations of those standards. Only markets are positioned to collect and convey the information that resource owners need to know if they are to allocate resources so as to maximize society's happiness. This is a topic we explore further in the next chapter.