Recently in a comment on a news article, I read someone arguing that the beauty of government regulations is that usually pay for themselves through fines, so it doesn’t make sense to blame regulations in discussions of debt and deficit. This was an interesting point, as I had never really thought before about fines from violated regulations as a source of income for the government. But the more I thought about it, the more I thought that this viewpoint contains an inherent contradiction – even if fines completely offset the cost of implementing and enforcing a regulation.
First, I thought about a common kind of regulation and fine – a library’s fee for late book returns. You have to pay a library fine if you violate the “regulation” that requires you to return items after so many days. The regulation has the purpose of restricting a negative externality caused by the fact that someone else can’t borrow a book if you’re keeping it too long, and the fine serves as an incentive for you to follow the regulation. The key is that the cost to society of violating this regulation is rather small – I doubt anyone is dying or even suffering severe economic consequences due to your refusal to return a library book – so the cost to the violator is also rather small.
Now I thought about much larger regulations with much greater costs to society – regulations designed to prevent the collapse of a coal mine or an uncontrollable oil spill, for instance. It seems like whenever there is a large corporation-caused disaster, we find out that the corporation had a history of violating regulations. The typical response is that this proves that they were a greedy corporation that didn’t care about safety. I say it proves that the regulations didn’t prevent the disaster! The corporation paid fines as a result of those earlier violations, and maybe those fines even offset the cost of enforcing those regulations, but that’s nothing compared to the societal costs of hundreds of dead miners or hundreds of miles of polluted coastline.
I think the key is that there are two kinds of costs here. The first is the cost to society that led to the regulation in the first place, and the second is the cost to government of enforcing the regulation. It’s great if fines can offset the governmental cost of carrying out such regulation, but that should not be looked at as a justification – because you still have the costs to society. Otherwise, you are saying that you desire an incentive structure with a goal of always getting those fines from violators. But if the whole reason for the regulation is to prevent the societal costs of violating it, then shouldn’t you desire an incentive structure with a goal of no one ever violating those regulations? Then the costs to society would never be incurred – but you wouldn’t obtain any fine revenue, either (in which case enforcement costs would have to come from another source).
Furthermore, the primary reason for opposing some regulations is not because there is a governmental cost of enforcing them, but because there is a societal cost of the regulation itself that is greater than the societal cost it is trying to prevent! If it becomes illegal for stores to sell 100W incandescent light bulbs, for instance, and I am concerned about government intervention in the marketplace, I don’t care if the fines to a merchant who violates this regulation pays for the cost of figuring out that he violated the regulation. I’m more concerned about the effects on society – of the extra costs of light bulbs on the poor, or of the inferior standard of living caused by the alternative light bulbs, etc, etc.
So in summary, the reason to support a regulation would be if it reduces negative externalities, and the reason to oppose a regulation would be if it increases negative externalities. Most of the arguing comes from disagreements between liberals and conservatives about whether specific regulations – or regulations in general – are reducers or increasers of such negative externalities. There is a separate governmental cost to enforcing such regulations, and it’s great if fines can cover that, but the primary use of fines should be to offset the costs to society or prevent them altogether. Finally, fines do nothing to justify the regulations that actually cause costs to society. So I don’t believe that you can use revenue from fines as a defense of regulations. What do you think?