Protection from Lemonade Stands

I came across a story that made the rounds in national news recently: a 7-year-old’s lemonade stand in New York that was shut down by state health officials for failure to have a permit. The stand was located at his parents’ home, which was near county fairgrounds.

The story attracted media attention partly because the incident was seen as an example of heavy-handedness among regulators. After politicians got involved, the boy was allowed to re-open his lemonade stand, so long as he sold only lemonade–his earlier venture into water and snow cones was quashed.

What caught my eye was the fact that the health department’s involvement was apparently triggered by complaints from vendors at the fairgrounds, not by dissatisfied customers who were worried about their health. As the New York Times reported it:

[A]n inspector with the state Department of Health soon told the Mulvaneys that they needed a permit because their venture was similar to those of permitted vendors at the fair, said Jill Montag, a health department spokeswoman. (Ms. Montag said at least four vendors inquired about the Mulvaney family’s stand.)

This brings to light something that economists have pointed out repeatedly about regulation: it is often used as a way to limit competition rather than to achieve the advertised ends. When looking at regulation, it’s best to look at it with a degree of skepticism. Who benefits from the regulation? Who is lobbying for it? Sometimes the answers can be surprising.

In graduate school, my dissertation focused on environmental regulation (it’s nearly 170 pages that I encourage you to read if you suffer from insomnia). Some of the regulations I looked at in that work applied to hazardous waste incineration, which had become a big business in the 1980s after a federal law required certain toxic waste to be incinerated. Soon companies that manufactured cement figured out that they, too, could incinerate toxic waste as a side business, because they already had kilns that heated the raw materials for cement to several thousand degrees Fahrenheit. They began to compete with incinerators, and the price of incinerating toxic waste plummeted. Incinerators got pretty upset, and began to quietly fund “grass-roots” environmentalist groups that would in turn file lawsuits against cement kilns alleging failure to comply with certain environmental regulations. The emissions from cement kilns likely weren’t any different from those coming from ordinary incinerators, but the environmentalist groups understood that the flow of money depended on their targeting cement kilns only. Eventually, this scheme came out in court. The whole sorry episode showed that regulations–even if they were initially intended to create a general public benefit–can be harnessed by groups that simply want to shut down their competition.

There are other examples. It seems clear, for instance, that forest products company Weyerhauser benefited from efforts to protect the spotted owl, since discoveries of the owl on non-Weyerhauser land made forests owned by Weyerhauser more valuable. GE, Philips, and other light bulb manufacturers benefited from “energy conservation” efforts to replace incandescent light bulbs with higher-tech CFLs and LEDs, since their market share of the high-tech bulbs was greater than their share of incandescent bulbs. And on and on. When evaluating regulation, we need to think not only about the stated purposes of the regulation, but also what might be going on behind the scenes. Sometimes regulation that may appear to create some kind of social good can be counterproductive–environmental regulations might actually hurt the environment in some cases–but the regulation is created anyway because some group benefits from it.