Saturday, March 04, 2006

Understanding regulation in markets better

I alluded to costs in the previous post because there is a dramatic way it relates to the understanding of markets and well, libertarianism. I have my operational reservations against libertarianism but there is need for a better understanding of this animal.

A simple rule often works dramatically well when you apply it consistently. Let who does a damage pay for the damage. There are complexities which go beyond the scope of this post but that should suffice a starting point to think more. The idea is based on the cost incurred in a market setting. So if a market does not involve the payment or consideration of externalities than it is a poorly designed market. All that talk about freedom and choice of libertarianism is first-level knowledge. When you understand who is incurring the cost and who should pay for it, you are one level deeper into the complexity of it. The next part is in designing the incentives to make sure that the party who does the damage pays for it or takes into account the costs of his activity that may cause damage.

For the context of what follows read A Nation of Guinea Pigs, but it is not necessary.

The difference between bureaucratic regulation and legislative regulations should be pointed out. Having a government board to clear a clinical trial is bureaucratic regulation. Having a regulation that allows a legal argument between two parties for deciding the costs incurred, in case of a faulty trial, is a legislative regulation.

India has an oversupply of the former and an undersupply of the latter, in quality and quantity.

In fact, there is a crying need for regulation. Free-markets need more regulations and litigation. But to equate demand of regulation with government supply of regulation is an usual jump in logic and can be faulted as this argument When regulations are necessary. Today the government does bureaucratic regulation which we know doesn't work and well, won't work. If something goes wrong, you cannot point to the government and ask them for compensation. If the legislative regulation had allowed for litigation and mechanisms like civil tort, you would have a host of lawyers scavenging the grounds of Sevagram. Ultimately the true costs and benefits of guinea-pig treatment would be taken into account by both parties.

In finality, you need more legislative supply of regulations that allow litigation between the parties directly, not bureaucratic ones that distort the market of costs.

Addendum: You find the same search for this understanding echoed at
AICTE: Waking up from 61 years of slumber.

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