People seem to be surprised by the fact that the new regulation of the cigarette market in Hungary turned out to be a means of benefitting cronies, relatives, and party members. The outcome is not what was said it would be: a means of reducing smoking and preserving the health of young people. Believe it or not, I am not at all surprised. It is not because I know that our politicians are bad guys. I think they are just as bad as the Hungarian median voter. I am not surprised because this situation is exactly the one which economics tells us regulation will lead to.
You may think that regulation serves public interest. This is what politicians tend to say and this assumption seems nice on the blackboard during a lecture in economics, too. The problem of this idea is that it is not true: generally speaking regulation does not lead to better social results.
In a famous article (1) four distinguished economists, Simean Djankov, Rafeal La Porta, Florencio Lopez-de-Silanes and Andrei Schleifer compare data from eighty to fifty countries from all around the world and come to the conclusion that it is rather the so-called tollbooth theory of regulation that is true. Let me quote what they say this means. The tollbooth theory of regulation, they say, “holds that regulation is pursued for the benefit of politicians and bureaucrats … Politicians use regulation both to create rents and to extract them through campaign contributions, votes, and bribes. In the tollbooth theory the regulation of entry enables the regulators to collect bribes from the potential entrants and serves no social purpose” (ibid., p. 3). This means that you as a politician regulate the trade of cigarettes in order to collect the money which you will spend on political campaigns and in order to give more power to the bureaucrats you appoint. What is more, the authors go on saying that “we do not find that stricter regulation of entry is associated with higher quality products, better pollution records or health outcomes, or keener competition” (ibid, p. 4) On average, regulation will not make people healthier.
But why do people tolerate a regulation that brings such bad results? Again let me quote a famous article by an economist. Bruce Yandle described situations like this as an alliance between the “bootleggers” and the “Baptists”(2) . The bootleggers are those who benefit from the regulation because they can sell cigarettes at a high price or because they profit form smuggling cheap cigarettes from Ukraine, for example. The Baptists are those who support the regulation for ideological reasons. They seem to think that people cannot take care of their own health or that of their children and they feel they must defend people against themselves. They are the good guys. They will help people even if people do not want to be helped by anyone. They play the Big Nurse and treat people like patients of a mental institution who need to be told what not to do. If we think that we need a Big Nurse to tell us how much to smoke, we should not be surprised seeing that the treatment fees we pay to the Big Nurse are ending up in the pockets of the Big Nurse’s friends. Or should I say cronies?
1 May 2013
Pál Czeglédi
(1) Djankov, S., La Porta, R., Lopez-de-Silanes, F., Shleifer, A. (2002). The Regulation of Entry. Quarterly Journal of Economics, 117(1), 1-37.
(2) Yandle, B. (1983). Bootleggers and Baptists – the Education of a Regulatory Economist. Regulation, May/June, 12-16.
