George Stigler's Contribution to the Economic Analysis of Regulation

by Sam Peltzman
George Stigler's Contribution to the Economic Analysis of Regulation
Sam Peltzman
The Journal of Political Economy
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Sam Peltzman

Universiq of Chicago

George Stigler changed the way economists analyze government reg- ulation. This enormous legacy is essentially embodied in two articles: his 1962 analysis of electricity rates with Claire Friedland and his 1971 theoretical piece. There were, to be sure, precursors and successors in his own work. But none of them so profoundly affected the course of intellectual inquiry as these two.

The importance of both articles rests more, I believe, with the ques- tions each posed than with the answers. Even by the standards of the day, neither piece evinced the sort of technical sophistication that the profession has come to admire. Neither produced conclusions that were impervious to all serious subsequent challenges. But both pro- duced insights that have altered the course of research in the area to this day.

To understand Stigler's contribution, it is best to proceed chrono- logically and to begin with the state of the field around 1962. There is room here only for caricature rather than extensive survey. How- ever, I think it is fair to say that the field derived its main energy from the normative economics of marginal cost pricing. The proper role of government was to correct the private market failures that prevented attainment of marginal cost pricing. Applied economic analysis of regulation was then largely descriptive, and its main ten- dency was to show how the regulatory institutions constrained depar- tures from marginal cost pricing.

Monopoly was viewed as the main barrier to marginal cost pricing, and the "natural monopoly" occupied center stage in the economics of regulation.' The prime examples of natural monopoly were sup-

' Man-made monopolies were the main subject matter of industrial organization. Stigler's profound influence on this field is summarized by Harold Demsetz's article in this issue.

[Journal of Polztzcal Economy, 1993, vol. 101, no. 51 01993 by The University of Chicago. All rights reserved. 0022-3808/93/0105-0003$01.X

posed to be the public utilities. The main role of utility regulators was held to be prevention of private exploitation of the market power that would inevitably flow from natural monopoly cost conditions. And the broad professional consensus was that utility regulation suc- ceeded in this task.

It was understood that regulation did not succeed completely in forcing price down to marginal cost. Political and legal constraints on public subsidization of the difference between marginal and average cost forced the regulators to set something approximating average cost prices.2 But it was regarded almost as given that without regula- tory intervention utility rates would be substantially higher than they were.

The main problem with this professional consensus was that it had never been subject to empirical verification prior to 1962. In this fact lies the main contribution of the Stigler-Friedland paper. As put succinctly by Joskow and Rose in their 1989 review of the subsequent literature, "Systematic empirical analysis of the effects of economic regulation originated with Stigler and Friedland's 1962 paper which sought to measure the effects of state commission regulation of fran- chised electric utilities. . . . Since 1962 there have been several hun- dred scholarly studies of the effects of economic regulation" (p. 1495).

As the quote implies, the intellectual contribution here goes quite beyond primacy in the study of the specific effects of utility regula- tion. The tendency of economists to accept without examination the effects of a wide range of government regulation was pervasive be- fore 1962. This was changed permanently by the Stigler-Friedland paper. It launched an intellectual enterprise that is still in business.

The substance of the Stigler-Friedland article is a regression esti- mate of the reduced form

price =f (D, S, regulation), (1)

where D is demand shifters (urbanization and income) and S is non- regulatory supply shifters (fuel price and share of output from [low- cost] hydro power). The sample is a cross section of states in the early 1920s; regulation is represented by a binary dummy. This setup took advantage of the uneven spread of state regulation of the industry prior to 1920, which left about one-third of the states unregulated.

The typical electricity rate structure was, and is, full of nonlinearities. They usually make the marginal price facing a customer less than the average price, thereby mitigat- ing the inefficiency from simple average cost pricing. A good part of the applied analysis of utility rates was then, and is today, concerned with refining the complex rate structures that were understood as necessary components in the regulators' striving for efficiency.

The main result was a statistically weak and small (under 5 percent) difference between prices in regulated and unregulated states. (A similar result was obtained for output.)

The impact of the Stigler-Friedland article on the profession owed as much to this then startling result as to the methodological innova- tion of estimating the effect of regulation from an explicit statistical model.3 Had the result merely confirmed the conventional wisdom, economists might have been less eager to pursue the effects of regula- tion. It is, in this connection, ironic that the original result is wrong about the magnitude (but not the statistical significance) of the effect of regulation. A miscoding of the dummy variable for regulation (regulated states = + 10) and the use of common instead of natural logs caused the estimated effect of regulation to be dramatically un- der~tated.~

Table 1 sets the historical record straight by repeating the key regressions on the original data set (provided by Claire Friedland). There are a number of minor discrepancies, but the most important result is the size of the coefficients of the correctly coded dummy variables in columns 3 and 6. They imply that regulation lowered price by about a fourth and thereby caused output to rise by over half.

These specific results were superseded by subsequent work.5 The more important outcome of the article was that economists began eagerly estimating effects of many kinds of regulation. They also began to confront a number of previously neglected theoretical ques- tions.

One of these questions concerned the prior beliefs that economists should bring to any study of the effects of regulation. If Stigler and Friedland were right about the inadequacy of the view that electricity regulators prevented the depredations of monopoly, what should one expect from this form (and from other forms) of regulation? As is implied by their title, Stigler and Friedland grappled with this ques- tion and thought they had an answer: that demand and cost functions were sufficiently elastic to preclude a substantial effect of regulation. Perhaps the industry was a natural monopoly in some narrow techni-

'In an earlier version of the paper, the estimate of (1) included a quantity term on the right-hand side. When this version was presented to the Industrial Organization Workshop at Chicago, Stigler was forcefully criticized by Dale Jorgenson, then a faculty member in the Economics Department. Jorgenson pointed out that Stigler had esti- mated a demand function in which no clear meaning could be assigned to the insignifi- cant coefficient of the regulation dummy. This was the only time I ever saw Stigler rendered utterly speechless.

Claire Friedland brought this to my attention, and she credits Kevin J. Murphy with first having uncovered the coding error. 'Joskow and Rose (1989) have a good summary.



Price Quantity

Rerun, Rerun, As Dummy Natural As Dummy Natural INDEPENDENT Reported Corrected Logs Reported Corrected Logs VARIABLE (1) (2) (3)* (4) (5) (GI*

Urban population

Cost of fuel

Per capita income

Proportion of horsepower hydro Regulation

R 2:

With regulation

Without regulation

NOTE.-CoIs. 1 and 4 come from Stigler (1962), table 3. Price (average revenue per kilowatt hour), quantity (kilowatt hour), urban population, cost of fuel, and per capita income are in conlmon logs for cols. 1, 2, 4, and 5 and in natural logs for cols. 3 and 6. Urban population is zero for Vermont, North Dakota, hlississippi. Idaho, Wyoming, New Mexico, and Nevada. Claire Friedland informs me that they were set equal to 100 to permit the use of logs. This procedure is followed in the reruns. The regulation dummy was initially miscoded as equal to 10 for regulated states and zero otherwise. For cols. 2, 3, 5, and 6, this is corrected to equal one for regulated states and zero otherwise. For cols. 1-3, the sample size is 47 states (District of Columbia, Maryland, and Delaware are combined); for cols. 4-6, the sample size is 43. Data for Arizona and New Mexico are unavailable. Montana and Utah, and Vermont and Rhode lsland are combined. Fuel cost, hydro, and income variables are estimated as population weighted averages for the combined states. Absolute t-ratios are in parentheses.

*Entries in this column are the same as in col. 2 except where noted.

cal sense. But both customers and capital were sufficiently mobile to leave little pricing discretion for regulators.

Stigler and Friedland did not try to generalize this a~sertion.~

However, to Stigler's colleagues and students of the early 1960s, he did press the case for a basically competitive economy with substantial long-run resource mobility in which regulation was bound to be mainly ineffective. Some of his published work of the period reflects this view.7 But he gradually abandoned it.

Stigler did this under the accumulating weight of the evidence spawned by the Stigler-Friedland article. Much of this found regula- tion to be effective but in ways opposite to what the traditional "public interest" model of regulation would suggest. A clear statement ap- pears in Jordan's (1972) survey of this first wave of post-Stigler-

No evidence was offered in its support. See Stigler (1964), which argues the ineffectiveness of securities regulation, and Stigler (1966) on the failure of the antitrust laws to affect industrial concentration.

Friedland empirical studies. He finds that "the essential thrust [of the evidence] has been consistent with implications derived from a producer protection hypothesis once the effects of prior market structure were taken into consideration" (p. 174). As Jordan saw it, where the prior (i.e., ex-regulation) market structure was monopoly, as in electricity, regulation was found to be ineffective. Where compe- tition would otherwise prevail (his prime examples pertained to trans- portation), regulation typically lowered output, raised price, and generated monopoly rents. Since effective regulation of a natural monopoly would be inconsistent with the interests of sellers, the single story consistent with the whole pattern of mixed results on the effects of regulation was, according to Jordan, one in which regulators pre- served or promoted the interests of sellers rather than consumers.

Jordan's formulation is symptomatic of a revisionism that, by the early 1970s, was exercising considerable influence over the profes- sion. Within a decade, the benign view of regulation as promoter of the general interest had been mainly abandoned. The ascendant im- age was of the regulator captured by the regulated.

While this image was hardly new (see, e.g., Bernstein 1955), the willingness of many economists to embrace it on the basis of mounting evidence was new. As with much else in economics, evidence pre- ceded theory. In this case, the evidence of capture seemed to ask for an explanation of why regulation had come to work in this seemingly perverse way. The answer provided in Stigler's (1971) article on the theory of regulation stands as his second major contribution to the economics of regulation.

As with the Stigler-Friedland article, it is necessary to distinguish the methodological contribution of the 1971 article from its specific result. The specific result is a theoretical rationale for capture of regulatory agencies by producer interests. In subsequent develop- ment of Stigler's theoretical apparatus (e.g., Peltzman 1976; Becker 1983), regulators serve a broader constituency than regulated pro- ducers. In time, Stigler came to accept these generalizations. So, his capture result needs to be taken in its historical context. In 1971, the wave of professional enthusiasm for evidence of capture was just cresting.

What survives from Stigler's 1971 article is an integration of the economics of regulation and the economics of politics in which trans- actions between self-interested suppliers and demanders determine the regulatory outcome. Because of this supplier-demander frame- work, the body of theory pioneered by Stigler has come to be called the "economic theory of regulation." In any market, transactions are costly, and his 1971 article is the first serious inquiry into the costs of expressing a politically effective demand to regulators. This yielded an emphasis on the importance of organized interest groups that remains an important part of contemporary analyses of regulation.

The suppliers in Stigler's theory are unspecified political actors. No distinction is made among legislators, executives, and their regulator- agents. What they have to sell is power: tangibly, power over, say, prices and entry, but ultimately over the wealth of a regulated indus- try's buyers and sellers. These two groups compete for access to this power, and the high bidder wins. The currency with which the de- manders bid is obviously a bit more complex than the stuff reported in the monetary aggregates. It includes votes delivered in support of politicians, campaign contributions, jobs in the political afterlife, and so forth. The prototypical result of the competition is the triumph of the cohesive producer interest over the diffuse consumer interest. This is manifest in regulatory decisions on prices and entry that trans- fer rents from consumers to producers. More generally, the political equilibrium in Stigler's model is one in which cohesive minorities tax diffuse majorities.

To get this result, Stigler drew on several strands of the then emerging public choice literature. His basic assumption of political utility maximization was an important ingredient of James Buchanan and Gordon Tullock's (1962) influential work. Anthony Downs (1957) had argued that voters would be "rationally ignorant" about most public policies because of weak incentives to acquire information. For this reason, Stigler argued, consumers were an unreliable ally of the rational regulator. Their stake in the regulatory outcome was typically too small to make them informed supporters of proconsumer policies or opponents of anticonsumer policies. By contrast, the producer stake was typically large enough to overcome rational ignorance. But knowledge needs to be translated into power, and in politics this requires organizing to bring pressure to bear on the political process. Here the compact producer groups also have the advantage, because they can more easily overcome the "free-rider" deterrent to collective action emphasized by Mancur Olson (1965). In short, producers have decisive information and organization cost advantages over consumers.

An important reason for the lasting influence of Stigler's 1971 arti- cle-one recent review (No11 1989) calls it "the watershed event" in the literature on the politics of regulation-is primacy. While the components of Stigler's theory were not new, the application to regu- lation was new. And it occurred at an appropriate time. Prior to 1960, economists essentially ignored the political context within which regulation occurs even as the economic analysis of politics was making important strides. By 1970, economists were seeking a rationale for the seemingly perverse effects their empirical research had uncov- ered. Stigler's theory provided it in a form bound to appeal to econo- mists: a model of rational choice. Whatever the subsequent modifica- tions of the theory, the emphasis on regulators as rational actors has remained a durable part of the economics of regulation. So too has the emphasis on the role of organized interests in regulatory politics. In this way, the economics of regulation has been decisively changed. The pre-1960, benign view of the effects of regulation has not been entirely superseded. But it is no longer simply assumed. Arguments that regulation enhances efficiency now must show what is "in it" for the political actors when they move in that direction.

This theoretical transformation came to have consequences not only for the study of regulation but also for economists' views on public policy. I would credit the line of work begun by Stigler's theory with a catalytic role in shifting the professional center of gravity to- ward skepticism about the social utility of regulation. Economists ven- erate efficiency. When they became convinced that regulation was not in fact primarily efficiency enhancing, their ardor for it cooled. When they became convinced that the primary goal of regulation was not, even in principle, likely to be efficiency maximization, their ardor cooled f~rther.~

To be sure, regulation does not yet occupy the same place as, say, tariffs. Economists are almost unanimously convinced (without much evidence) that tariffs decrease welfare, though they admit the contrary as a theoretical possibility. Regulation elicits a more diverse reaction, both across types and across economists. But this difference has narrowed considerably, because economists now understand that regulation and tariffs share a common political sus- ceptibility to the influence of organized interests.

Stigler's theory has also affected the course of empirical research on regulation. His 1971 article contains some direct applications of the theory. Measures of regulatory decisions (e.g., weight limits on trucks) are regressed on measures of the strength or stakes of affected interest groups (the investments of farmers in trucks). However, the main influence of the theory lies in a direction different from such direct applications. It has been to sensitize researchers to look toward interest group pressures for an understanding of the effects of regu- lation. I can illustrate this by comparing styles of pre- and post-1971 empirical research on regulation. Consider, as an example of the

I use efficiency here in the traditional sense of net surplus maximization. Becker's (1983)development of Stigler's theory argues that regulators will be drawn to efficient modes of redistribution, because deadweight losses reduce potential political utility. But even Becker's equilibrium generally has positive deadweight losses because pro- ducer and consumer interests do not systematically receive equal weight and because of the transaction costs of the competition for political influence. Accordingly, regulation cannot systematically be expected to increase a conventional welfare measure.

former, the Stigler-Friedland article. The main line of inquiry here is, Did regulation accomplish its stated goal (lower rates)? The Stigler of 1962 armed with his theory of 1971 might have asked instead, Which influential interest groups would the utility commission plausi- bly serve? And he might then have gone on to inquire about the effects of regulation on, say, workers, large users of electricity, suppli- ers of fuel and equipment, and so forth.g Questions like this are commonplace after 1971. There is room here only for illustrative examples. One would be the literature on the effects of regulation on wages.'' The stated goals of ordinary rate entry regulation are silent about the welfare of workers. But economists came to under- stand that workers had a concentrated, often organized, interest in regulatory decisions. So they were drawn to investigate, with some success, the connection between regulation and wages. Another ex- ample would be the literature on the effects of the convoluted regula- tion of oil prices following the rise of OPEC (e.g., Kalt 1981; Smith, Bradley, and Jarrell 1986). This regulation had minor effects on the prices paid by consumers of refined products, and a pre-1971 type study might have stopped after demonstrating that. Or it might have puzzled over the apparent perversity of the numerous inefficient re- fineries induced to enter by the regulation. The actual literature fo- cused on the transfer of rents among interest groups (refiners gained and producers lost). Stigler's theory provides no clear insight about which interest group triumphed here. But it created the intellectual background in which the search for the distribution of rents among these interests becomes a primary focus of research.

George Stigler had an abiding faith in the progress of economics. It is, I believe, appropriate to conclude this review of his work in the spirit of that faith by indicating some areas in which progress in the economics of regulation remains to be made.

Which industries are regulated?-There are, by my count, over 1,500 entries under "Associations" in the District of Columbia Yellow Pages. Obviously, lobbying groups could not survive without obtaining something for their members. Yet only a handful obtain the impor- tant transfers that Stigler taught us to associate with entry and rate regulation. This is so in spite of the apparent information and organi- zation cost advantages that many industry groups would appear to have over consumers. It will take a more precise theory to explain

The limited discussion of such matters seems naive in light of the later theory. For example, Stigler and Friedland inquire into the residentialiindustrial price ratio be- cause "as a political matter, the numerous residential users might be favored relative to industrial users" (p. 9).

'O This literature was essentially nonexistent prior to 1971. It includes Hendricks (1977), Ehrenberg (1979), and Rose (1987).

why, for example, the trucking industry seemed able to extract so much more rent from regulation than a myriad of interest groups with apparently similar characteristics. The deregulation of that in- dustry illustrates the complementary problem: Why did this well- organized producer interest so suddenly and completely lose political support for the regulatory rents?"

The timing of regulatory innovation.-Stigler's "central thesis" was "that, as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit" (1971, p. 3). This metaphor of government as order-taker is useful in highlighting the importance of interest groups. But it may obscure some interesting regularities on the supply side of this market. One is the pronounced cyclical character of regulatory innovation. Consider the pattern of establish- ment of new agencies and of enactment of laws affecting their opera- tion for the 20 presidential terms from 1900 to 1980.12 Over this whole period, 49 agencies were established and 334 regulatory laws were enacted. Only 10 agencies were established in the eight pre- New Deal administrations, but Woodrow Wilson's first term accounts for four of them. The concentration of legislation is less pronounced, but Wilson's two terms still account for 41 percent (19 of 46) of the pre-New Deal laws. The next burst of activity occurs during Franklin Roosevelt's first term. It accounts for over half the agencies (6 of 9) and laws (30 of 57) in the four terms to which he was elected. One might be tempted at this point to conclude that newly elected Demo- crats tend to foster regulation. But the postwar period belies this. Here a Republican administration, Richard Nixon-Gerald Ford, dominates regulatory innovation as completely as Wilson's did in the pre-New Deal period. It accounts for over half the new agencies (19 of 30) and just under half the new laws (106 of 231) in the 1948-80 period. Time may be as important as party. For example, of the laws not enacted during the Nixon-Ford years, around two-thirds (78 of 125) were produced in the two surrounding Democratic administra- tions.

These are crude measures, and they need to be interpreted cau- ti~usly.'~

But they leave a clear overall impression of long, quiet pe- riods punctuated by relatively brief eruptions of activity. Post-1980

"I have argued elsewhere (Peltzman 1989) that an interest group theory of regula- tion can accommodate deregulation when economic change, including change induced by the regulation, weakens the interest group's stake in continued regulation. This does not appear to have occurred prior to deregulation of trucking.

l2 These data, from Penoyer (1980, 1982), do not extend beyond 1980. l3 They weight equally the Federal Reserve Act and the Bald Eagle Protection Act, laws can reduce regulation as well as increase it, etc.

data would surely strengthen this impression.14 On its face, these pronounced waves of regulatory innovation are hard to reconcile with the passive role of government in Stigler's theory. The growth and decline of pressure groups, changes in the technology of political pressure, and so forth would seem to imply a smoother time path. In my development of Stigler's theory (Peltzman 1976), I showed how large economic shocks, such as the Great Depression, could produce unusual pressure for regulatory innovation. But the macroeconomy of the 1970s was hardly so unusual as to satisfactorily account for the regulatory boom of the Nixon-Ford years, when around one-third of all the 1900-1980 regulatory innovation occurred. It is hard to avoid a suspicion that supply conditions play a role here. For example, even if a Democratic presidency is not a necessary condition for a regula- tory boom, a sizable Democratic majority in the Congress seems to be. In the four terms with the most regulatory innovation (Wilson I, Roosevelt I, Nixon, and Nixon-Ford), the Democrats' average share of House seats (64 percent) exceeded c~mfortabl~'~

their average share (53 percent) in the remaining 16 terms. But large Democratic majorities are hardly sufficient, given their domination of Congress over the whole post-New Deal period.

Who demands regulation?-Another problem for the theory of regu- lation concerns the nature of the commodity being transacted. The putative buyers in Stigler's theory sometimes seem overly reluctant. For example, the primary beneficiaries of the Motor Carrier Act of 1935 were the truck owners and unionized workers. But the industry was ambivalent about the law, and the union had not yet been orga- nized in 1935. Anecdotal examples of industry resistance to regula- tory innovation abound: the securities industry's resistance to the Secu-

l4 Consider the following data on growth of real regulatory expenditures and agency employment (from the Center for the Study of American Business, Washington Uni- versity, St. Louis):

Spending Employment

Nixon-Ford (from '70) Carter Reagan I Reagan I1 Bush (est.)

No subsequent administration comes close to matching the growth rates of the Nixon- Ford years. ''But not significantly, given the small samples.

rities and Exchange Commission, the drug industry's opposition to the 1962 Drug Amendments, and the broad opposition of manufac- turers to increased pollution regulation, to name a few. More system- atic evidence is provided by Binder (1985). He examines the stock market's response to 20 regulatory changes from 1889 to 1978 (of which 16 involve increased regulation). He finds no systematic ten- dency for increased industry wealth around these changes.

Of course, industry interests were not subsequently ignored. The truckers did get entry control, the 1962 Drug Amendments did create a barrier to entry, the Securities and Exchange Commission did sanc- tion a brokerage rate cartel, and established polluters did get a cost advantage over new plants. Nevertheless, the Stiglerian metaphor of government as order-taker seems to obscure a more complex interac- tion between regulators and regulated. Their relationship is not con- cretized at conception, but rather seems to evolve over a time during which the industry interest has to be defined, possibly reshaped by the regulatory institutions, and asserted.16

Waste.-In Stigler's theory, deadweight loss is one of the costs of the political competition for regulatory rents. This was a major theo- retical advance. Previously, economists mainly imprecated against the numerous instances of inefficiency created by regulation. Now, when one was faced with something like backhaul restrictions in trucking," there was a new intellectual challenge: were there really cheaper methods of preserving the truckers' rents in a world in which access to political power was costly? The recent growth of health, safety, and environmental (HSE) regulation poses the problem that the an- swer seems too often to be "yes."

The main problem here is one of magnitude. The important insti- tutional innovations occurred in the late 1960s and early 1970s and contributed significantly to the aforementioned regulatory boom of the Nixon-Ford years. The design of automobiles and other con- sumer products, safety in the workplace, and, most important, the condition of the environment became subject to federal regulation. Since then the economic costs of HSE regulation have come to dwarf those of the older forms of regulation. This is driven mainly by the

l6 For example, the 1962 Drug Amendments substantially increased the concentra- tion of innovation (Grabowski 1976). This was a result of exit from innovation conse- quent on regulation-induced increases in costs. Thus the increased concentration helped some firms and hurt others. Even if these effects could have been anticipated in 1962, it is unclear that they are consistent with the interest of the "industry" as it was structured in 1962. However, a proposal to substantially lower regulatory barriers to entry might well meet with resistance from the industry as structured today. Today, incumbent firms are presumably the low-cost adapters to the regulatory system, and entry might jeopardize their accumulated regulatory capital.

l7 Whereby a truck carrying freight from A to B had to return empty to A.

costs of environmental regulation, which imposes direct costs ex- ceeding $100 billion per year and entails forgone output at least this large (Crandall 1992).

One approach economists took in analyzing HSE regulation, in- spired by Stigler, was to look for the rent creation and distribution elements in it. This search did not go unrewarded (see Gruenspecht and Lave 1989, pp. 1530-31). The tendency for HSE regulation to create entry barriers and shelter high-cost firms and workers from competition proved not so different from more traditional modes of regulation. This line of research will likely continue to be fruitful. But it is unlikely to provide a very powerful explanation for HSE regulation, because the costs of environmental regulation are just too large. For example, they are roughly double the total profits of the whole manufacturing sector. Surely there are cheaper ways to create rents.

Another line of inquiry, inspired by the traditional efficiency ratio- nale for regulation, has been to look for HSE benefits that might offset the costs. This has been mainly unsuccessful. While this is not the place for a survey of the relevant literature (see Gruenspecht and Lave 1989), it is safe to say that finding benefits that come close to offsetting the costs has proved elusive. Low benefitlcost ratios are a common finding in the empirical literature.

Mainly economists have found waste, not simply in the elusive or low benefits, but more notably in terms of cost effectiveness. Most HSE regulation has evolved into highly detailed rules about design and process. The sobriquet economists award this mode of regula- tion-"command and control"-bespeaks, in its evocation of Stalinist central planning, a negative reaction. Our professional instinct is that such a system must violate the marginal conditions for cost minimiza- tion. And the evidence tends to reinforce this strongly. For example, a survey of recent HSE rules found a range of $100,000 to $72 billion in cost per statistical life saved across 24 adopted rules (Viscusi 1992,

p. 264). The precise meaning of this enormous range is surely debat- able,'' but the broad implication that value maximization cannot be high on the HSE regulation agenda is not. This is confirmed by the literature that estimates the difference between the lowest cost of achieving a given pollution reduction objective and the cost of current regulatory methods. The typical finding is that this difference is sub- stantial, often accounting for over half the current costs (Tietenberg 1988, p. 346). The literature leaves the clear impression that a large

For example, these are average, not marginal, costs; the exotically high figures may imply trivial total costs (divided by minuscule benefits).

chunk of what is by far the most expensive regulatory enterprise in history is being wasted.

A recent review of the literature I have just alluded to chastises economists: "When a movement as sweeping and important as the environmentalist-consumerism movement occurs, economists should not be complaining two decades later that government programs are not efficient; we should have done more to show how to improve the efficiency and effectiveness of these social programs" (Gruenspecht and Lave 1989, p. 1544). This criticism is misplaced. Economists know what steps would improve the efficiency of HSE regulation, and they have not been bashful advocates of them. These steps include substi- tuting markets in property rights, such as emission rights, for com- mand and control, emphasizing performance (lives saved) over de- sign (thicker guardrails); subjecting rules to costlbenefit tests; and so forth. The real problem lies deeper than any lack of reform proposals or failure to press them. It is our inability to understand their lack of political appeal.

George Stigler will be remembered for extending the economists' rational behavior paradigm to regulation. He argued eloquently against our tendency to treat public policy "as a curious mixture of benevolent public interest and unintentional blunders" (Stigler 1982,

p. 9). In so doing, he sensitized us to the political utility of seemingly inefficient policies. However, consider, for example, the literature on tradable emission rights versus command and control. It finds poten- tial efficiency gains so large that the political transaction costs of changing present policies must be a small fraction of them. Neither Stigler's theory nor, of course, the "benevolent public interest" model he criticized would lead us to expect perpetuation of present policies in these circumstances. There is, to be sure, halting movement toward more efficient policies.1y But even instant elimination of the ineffi- ciencies would leave a considerable historical puzzle. Perhaps it will be resolved by showing that economists have greatly overstated the inefficiencies of current policies. Otherwise, as George Stigler would undoubtedly remind us, inefficiency is just a synonym for our igno- rance. When our ignorance can be measured in billions (of dollars of seemingly pointless expenditures), the challenge to progress in the intellectual enterprise that owes so much to George Stigler becomes clear.

l9 Under the Clean Air Act of 1990, a tradable emission right system for sulfur oxide emissions is to be implemented in 1996.


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