FREE TO CHOOSE CHAPTER 7 WHO PROTECTS THE CONSUMER?

I. INTRODUCTION Can we depend wholly on Adam Smith’s invisible hand? The real question is whether the arrangements to supplement or control the market is better than what the market would have provided on its own Regulation has slowed growth, burdened both industry and consumers, and dampened innovation Identify the products in your life that you are most satisfied with and have shown the greatest improvement. Criticize the invisible hand argument.

II. THE INTERSTATE COMMERCE COMMISSION Established in 1887 to regulate railroads Initiated by farmers and consumers, RR themselves eventually pushed for regulation Competition arose from trucking in the 1920s Railroads pushed for trucking to come under authority of ICC The Motor Carrier Act of 1935 granted that authority Civil Aeronautics Board was established in airlines followed same pattern as RR and trucking Explain capture theory of regulation

III. FOOD AND DRUG ADMINISTRATION Food and Drug Act of 1906 created agency Arose from concern over food cleanliness Food, Drug, and Cosmetic Act of 1938 required all drugs to be approved by FDA 1962 amendments to 1938 Act gave FDA more control “Safety and caution in one direction can mean death in another.” Crucial questions: 1)Has FDA regulation been effective at reconciling those objectives? 2)Is there a better way?

III. FOOD AND DRUG ADMINISTRATION “Put yourself in the position of an FDA official charged with approving or disapproving a new drug. You can make two very different mistakes: Approve a drug that turns out to have unanticipated side effects resulting in the death or serious impairment of a sizable number of persons. Refuse approval of a drug that is capable of saving many lives or relieving great distress and that has no untoward side effects.” How would you respond?

IV. CONSUMER PRODUCTS SAFETY COMMISSION Activated on May 14, CPSC cuts across industries and has wide discretionary authority Why should government decide what is safe for us? Discuss advantages and disadvantages of setting standards prior to market implementation.

V. ENVIRONMENT Environmental Protection Agency established in 1970 “Attempts to use government to correct market failure have often simply substituted government failure for market failure.” “The real problem is not ‘eliminating pollution,’ but trying to establish arrangements that will yield the ‘right’ amount of pollution: an amount such that the gain from reducing pollution a bit more just balances the sacrifice of the other good things- houses, shoes, coats, and so on- that would have to be given up in order to reduce the pollution. If we go farther than that, we sacrifice more than we gain.” Will the market protect the environment? How much is the “right” amount of pollution?

VI. DEPARTMENT OF ENERGY Established in 1977 “The bottom line is that come what may, we the people shall pay for the energy we consume. And we shall pay far less in total, and have far more energy, if we pay directly and are left free to choose for ourselves how to use energy than if we pay indirectly through taxes and inflation and are told by government bureaucrats how to use energy.” Will biofuels eliminate, or even reduce, our dependence on foreign oil? What are the secondary effects of biofuels?

VII. THE MARKET “Perfection is not of this world. There will always be shoddy products, quacks, con artists. But on the whole, market competition, when it is permitted to work, protects the consumer better than do the alternative government mechanisms that have been increasingly superimposed on the market.” Mistakes and accidents will occur but gov’t regulation doesn’t prevent them “The great danger to the consumer is monopoly- whether private or governmental. His most effective protection is free competition at home and free trade throughout the world.” Which is better, the market solution or the government solution?