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QOTD: Regulation September 6, 2007

Posted by federalist in Government Regulation.
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CAFE standards are an excellent case study in counter-productive regulation. From Crandall and Singer’s essay on the subject:

The purpose of regulation is to curb behavior that is profit-maximizing but generates some external cost to society.

No country can expand its wealth by employing people in activities that entail more costs than benefits.

Any call for regulation must be based on a market “failure” — that is, failure of private markets to provide the proper incentives for contributing to social value. In the case of the current call for increases in CAFE, the market failure is generally identified as global warming or national security. But CAFE is a horribly inefficient mechanism for reducing carbon emissions because it does nothing to reduce emissions from power plants, older vehicles, home furnaces or industrial facilities. Nor would it apply to any emissions outside the U.S. Even if one accepts the debatable proposition that less reliance on oil would improve our national security, we should focus our attention on all oil consumption, not just that used in new vehicles. The cost of trying to reduce the harmful external effects of any form of consumption by arbitrarily taxing just 5% of it is extremely costly. A smaller tax on a much wider tax base always reduces the distortions caused by the tax.

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