On the cost of regulations

I've been pointed at the Telegraph article on Steve Hilton's advice to the UK government, and one thing stands out in the article; Mr Hilton is able to count the cost of regulation, but not the benefits.

It's trivially obvious that (to take one of Mr Hilton's examples) consumer rights laws cost some businesses money; what's not discussed is the benefits of those laws, and the cost to society of not having them. Let me lead you through an example, using an expensive consumer product that many people have: a television.

You can buy televisions at many different prices, each with different features; just looking at 24" screens, I can find a cheap TV at £129, or I can spend over £1,000 on a similar looking set that's the same physical size. It's when I start to look at the differences between the sets that the sheer diversity of product becomes clear; my cheap set has one HDMI input, and a DVB-T tuner. It must be powered from a 230V nominal 50Hz AC source (e.g. household mains). My expensive set has multiple HDMI inputs, a DVB-T2 tuner as well as the DVB-T tuner, the ability to be powered directly from a car "cigarette lighter" socket (e.g. for in-caravan use) as well as from AC between 75V and 250V nominal, at frequencies between 50Hz and 400Hz nominal (making it suitable for powering from a typical luxury yacht power socket). It has the ability to record TV programmes to an attached USB HDD, and to play them back later; generally, it is of much higher specification than the cheap set.

So far, this sounds reasonable; the expensive set is a much more desirable piece of equipment. Yes, I'd have to pay more for it, but I'll get what I'm paying for. Now imagine removing consumer rights laws - let's take the law that says that goods must be fit for the purpose they are sold for. Without that law, a dishonest trader could buy the £129 TV, put appropriate connectors on the case, and sell the TV for (say) £800. They'd make a hefty profit on every set they've sold, and because consumer rights laws don't exist, nothing stops them conning a few customers, changing their trading name (so all the noise about how crooked they are doesn't impact sales), and continuing to rip people off.

Who gains in this situation, and who loses? Obviously, the dishonest trader gains. The manufacturer of the cheap TV set gains. Consumers who get ripped off lose. Less obviously, honest traders lose out; because I can't be confident that a set is genuinely what it's claimed to be, I am less likely to buy an expensive set that does everything I want, preferring to buy a cheaper set, and easier-to-verify adapters to get the added functionality.

Worse, if you say that I should rely on well-written contracts to protect me, you get into a situation where every purchase I make is slowed down, as I get the retailer to read, analyse, and eventually agree to the contract terms I insist on to make the sale. The costs to all retailers and consumers of having to deal with individual contracts, each with their own quirks are high; the benefit of consumer rights laws is that we have a baseline that the retailer cannot attempt to wriggle out of that I, as a consumer, am happy to accept. Businesses thus only need spend the costs of understanding the laws once; consumers accept that they can trust businesses, and rely on the law protecting them from the few bad apples. Neither side pays day-in, day-out for the costs of protecting themselves against the rogues in the market - instead, the legal apparatus puts as much of that cost as possible on the rogues. Further, the nature of regulation means that the net cost to legitimate businesses of consumer protection is lower than it would be if each transaction attempted to include the terms required in an individual contract.

In short, even regulations that cost money in the short term don't necessarily cost money in the long run; often, the regulations exist so that honest businesses can survive in the market, even in the presence of crooks. The trouble is that the cost of regulation is obvious up-front; the benefits are not only sometimes taken for granted, but often are spread across all of society.