Chapter 14 Business Regulation 14 Regulation of Destructive Competition Another argument for government regulation is based on the existence of destructive, ruinous, or cutthroat competition. In direct contrast to the natural monopoly situation, where there is a shortage of competition, the destructive competition argument centers on a surplus of competition. In industries specialized as to location or purpose where there are high sunk costs in assets coupled with low operating costs, short-run bouts of intensive and perhaps destructive price cutting may emerge. Presumably, excess capacity triggered cutthroat competition in the early days of railroads. Competition among electric utilities, who must transmit power through wires, could mean several sets of power lines running down city streets, creating an environmental mess. This may be an argument for a government protected and regulated monopoly on the transmission of electricity, but it has no bearing on the need for regulation of the generation of electricity. The interstate pipelines for gasoline products are regulated, but there is competition among producers and refiners. Even if there were only one refiner, it would have to base its pricing decisions on what other firms might do if it tried to extract monopoly profits. The generation of electric power can be organized in a similar way. Duke Power, which serves parts of North and South Carolina, has proposed such a reorganization. As one of the nation’s most efficient producers of electricity, Duke stands to expand its market share under a competitive system. Regulation of prices is sometimes advocated as a safety measure. Some firms—for example, airlines and nuclear power companies—under competitive pressure to control costs may cut corners on safety. Regulation that keeps prices above competitive levels can induce such firms to compete in other ways—in terms of food quality, size of seats, or flight safety, for instance. Thus regulation can be seen as a means of correcting an under-production of safety. (If this argument is correct, the deregulation of airline rates in 1978 should have lowered the airline safety ratings.) Critics of this theory suggest that a desire to avoid higher insurance premiums gives unregulated firms an incentive to maintain their safety precautions. Safety costs may not be completely internalized by insurance premiums, however, as illustrated by the 1984 accident at the Union Carbide plant in Bhopal, India, which killed over twenty-five hundred people and injured thousands of others. Given continued population growth and industrial concentration, regulation in the interest of public safety may be expected to increase. The Evidence on Regulation The public interest theory is not applicable to all forms of government regulation. Clearly environmental, traffic, and other safety rules promote public goals. Nevertheless, economists worry that such regulations can be used to thwart competition. Most environmental laws impose more stringent pollution standards on new sources of pollution than on old ones. The ostensible reason for this double standard is that new sources can meet the requirements at lower cost than old ones can, but such provisions can also be used as barriers to entry into competition. Chapter 14 Business Regulation 15 Research has raised especially serious doubt about the usefulness to the public of economic regulation—regulation designed to restrict entry, pricing, and production decisions in specific industries like trucking, airline, bus, stockbrokerage, taxi, cable, and shipping services that appear to be competitive or contestable. In such industries, which were heavily regulated in the past, neither the prices charged nor the difficulty of entry can be justified on the grounds of efficiency. Much research, for example, suggests that the regulation of electric power companies has tended to prop up electric rates and to favor industrial and commercial users over residential users 6 Even in areas such as legal services and drugs, where the need for regulation has seldom been challenged, its value to the consumer is now being questioned. Does regulation affect the competitive performance of an industry? The evidence is mixed, and open to differing interpretations. Many health, environmental, and safety regulations have clearly imposed substantial costs on businesses, consumers, and workers. Both the profits and the competitiveness of U.S. steel firms and the wages of steelworkers appear to have been seriously damaged by environmental legislation, for instance. In the late 1960s and 1970s, regulation may have depressed the returns earned by electric utilities. Regulated industries have always had to wait for an upward adjustment of rates after a rise in costs. Apparently the unusually high rates of inflation during that period increased the strain on regulated industries. The story was different in the airline industry, however. As one researcher wrote, “Paradoxically the [Civil Aeronautics Board’s policies, on the whole, have probably had little effect on the rate of profit earned by the industry; but, without the Civil Aeronautic Act and the Board, these profits would have resulted from quite a different sort of operation.” 7 It was such arguments that led to the deregulation of the airline industry in the late 1970s. Other scholars have complained that FCC restrictions on entry into the broadcasting industry have enabled established broadcasting firms to make substantial profits. In the trucking industry, regulation had particularly poor results. Until the industry was partially deregulated in the 1970s, the ICC turned down hundreds of applications a year to enter the trucking business or extend existing service. In fact, from the late 1930s through the 1960s, the number of licensed carriers actually decreased because of regulation by the ICC. Regulations designed to ensure a “stable trucking industry” frequently took trucks miles out of their way, increasing the cost of hauling cargo and the rates charged. After taking a load to one destination, carriers were forbidden to pick up cargo for the return trip. The railroads had an entire century of regulation-induced problems. The results since deregulation in 1980 have been staggering. Prices have fallen, service has improved, profits have increased, and federal subsidies have fallen almost 90 percent. 6 For reviews of empirical studies and conceptual arguments, see Paul W. MacAvoy, ed., The Crisis of the Regulatory Commissions: An Introduction to a Current Issue of Public Policy (New York: W.W. Norton, 1970); James Miller III and Bruce Yandle, eds., Benefit/Cost Analysis of Social Regulation (Washington, D.C.: American Enterprise Institute, 1979); and George C. Eads and Michael Fix, eds., The Reagan Regulatory Strategy: An Assessment (Washington, D.C.: Urban Institute, 1984) 7 Richard W. Caves, “Performance, Structure, and the Goals of Civil Aeronautics Board Regulation,” in The Crisis of the Regulatory Commissions, p. 134. Chapter 14 Business Regulation 16 Additional gains will be more difficult as there are still many regulations in railroads, especially in labor-management relations. Overall, the weight of the evidence is against much economic regulation. It is true regulatory agencies have sometimes denied rate increases and required firms—railroads and airlines, for example—to maintain services they would otherwise have eliminated. Many economists, however, question whether regulatory agencies as a group have been pursuing the public interest in any systematic way. The Economic or Private Theory of Regulation Why has regulation so often had little (if any) effect in reducing the profitability of regulated industries? Perhaps regulators have been inept at carrying out their responsibilities—or regulation may be too difficult a task for any one agency to handle properly. Regulated firms have an incentive to deceive their regulators by fudging their books to inflate their costs. As we have seen, gathering accurate information on a company’s true costs and profits can be prohibitively expensive. Even with accurate accounting, there is an incentive to “gold plate” costs, as firms operate on a cost-plus basis. If demand is inelastic, these inflated costs can be passed on successfully to consumers. Moreover, regulation focuses on static efficiency and provides inadequate incentives for dynamic efficiency. A cost-saving innovation could lead to a cut in the utility’s price. A second explanation might be that while regulators are concentrating on prices and barriers to entry, firms may maintain profits by reducing the quality (and therefore the cost) of their products and services. The intent of regulation may also be circumvented in another, more subtle way. Regulators sometimes determine prices on the basis of a so-called fair rate of return or profitability on capital investment. Such a standard encourages firms, particularly utilities, to substitute plant and equipment for other resources, such as labor, which do not count as investment. For example, suppose a regulatory agency establishes that 10 percent is a fair return on investment. Firms will then be allowed to make profits equal to 10 percent of the value of their plant and equipment. Suppose further that the same amount of additional electricity can be generated by spending $1 million on plant and equipment or $1 million on labor. If a firm invests in plant and equipment, it can ask the regulatory agency to raise its rates to allow for an additional $100,000 in profit (10 percent of $1 million). If it uses labor instead, it will have no increase in investment on which to base a request for a price increase. By making production capital-intensive, firms can circumvent the intent of regulation. Thirdly, although regulation may be instituted with good intentions, regulators may become the pawns of regulated firms. If regulatory agencies are staffed by men and women who made their careers in the industries they are regulating, regulated firms may gain undue influence over regulatory policy. Finally, the biggest shortcoming of regulation is that it often has been applied to competitive or contestable markets. Even if originally the market was a natural monopoly, it may have moved through a cycle where it is now competitive and thus no Chapter 14 Business Regulation 17 longer in need of regulation. Many regulated industries are not now (and perhaps never have been) natural monopolies (e.g., motor trucking). In addition, some natural monopolies (e.g., main-frame computers) may have escaped the intricate web of regulation. For all these reasons, many economists have begun to discard or at least downplay the public interest theory of regulation in favor of an industry-centered view. Instead of seeing regulation as something thrust on firms, they have begun to view it as a service frequently sought by those who are regulated. 8 It is important to recognize that the public and private interest theories are not necessarily diametrically opposed. The seeking of private interest is consistent with certain types of efficient regulation, and the public interest theory recognizes that mistakes and culpable regulators make regulation inefficient at times. Probably the biggest impetus to the economic theory of regulation was the inadequacy of the public interest theory in answering two essential questions: Why were inherently competitive or contestable industries such as airlines, taxicab, and trucking regulated if the purpose was to protect against natural monopolistic pricing? Why do unregulated firms persistently desire to enter regulated industries if regulators push prices and profits to the bare-bones competitive level? The Supply and Demand for Regulation In the new expenditures theory of regulation, government is seen as a supplier of regulatory services to industry. Such services can include price fixing, restrictions on market entry, subsidies, and even suppression of substitute goods (or promotion of complementary goods). For example, regulation enables producers to suppress the sale of margarine in Wisconsin. Through the FCC, commercial television stations have been able to delay the introduction of cable TV. These regulatory services are not free; they are offered to industries willing to pay for them. In the political world, the price of regulatory services may be campaign contributions or lucrative consulting jobs, or votes and volunteer work for political campaigns. Regulators and politicians allocate the benefits among all the various private interest groups so as to equate political support and opposition at the margin. Firms demand regulation for their own private-interest, rent-seeking reasons. As we have seen, forming a cartel in a free market can be difficult both because new firms may enter the market and because colluders tend to cheat on cartel agreements. The cost of reaching and enforcing a collusive agreement can be so high that government regulation is attractive in comparison. The view that certain forms of regulation emerge from the interaction of government suppliers and industry demanders seems to square with much historical evidence. As Richard Posner has observed, 8 See George J. Stigler, “The Theory of Economic Regulation,” in The Citizen and the State (Chicago: University of Chicago Press, 1975), and Stephen Breyer, Regulation and Its Reform (Cambridge, Mass.: Harvard University Press, 1982). Chapter 14 Business Regulation 18 The railroads supported the enactment of the first Interstate Commerce Act, which was designed to prevent railroads from price discrimination because discrimination was undermining the railroad’s cartels. American Telephone and Telegraph pressed for state regulation of telephone service because it wanted to end competition among telephone companies. Truckers and airlines supported extension of common carrier regulation to their industries because they considered unregulated competition excessive. 9 Barbers, beauticians, lawyers, and other specialists have all sought government licensing, which is a form of regulation. Farmers have backed moves to regulate the supply of the commodities they produce. Whenever deregulation is proposed, the industry in question almost always opposes the proposal. Regulation as a Public Good for Industry To the extent that regulation benefits all regulated firms, whether or not they contributed to the cost of procuring it, industries may consider regulation a public good. This creates a free-rider problem, which occurs when people can enjoy the benefits of a scarce good or service without paying directly for it by pretending not to want that good or service. Some firms will try to free ride on others’ efforts to secure regulation. If all firms free ride, however, the collective benefits of regulation will be lost. The free-rider phenomenon is particularly noticeable in large groups, whose cost of organizing for collective action can be substantial. Someone must bear the initial cost of organization. Yet because the benefits of organization are spread more or less evenly over the group, the party that initiates the organization may incur costs greater than the benefits it receives. Thus collective action may not be taken. Free riding may explain why some large groups, such as secretaries, have not yet secured government protection. Everyone may be waiting for everyone else to act. Small groups may have much greater success because of their proportionally smaller organizational costs and larger individual benefits. Perhaps it was because only a few railroad companies existed in the 1880s that they were able to lobby successfully for the formation of the ICC. There are some exceptions to this rule. Several reasonably large groups, including truckers and farmers, have secured a high degree of government regulation, while many highly concentrated groups, such as the electrical appliance industry, have not. In highly concentrated industries. It may be less costly to develop private cartels than to organize to secure government regulation. In industries composed of many firms, on the other had, any one firm’s cost of securing regulation may be smaller than the costs of a cartel. Large groups also control more sizable voting blocks than small groups. They may have the advantage of established trade associations, whose help can be enlisted in pushing for protective legislation. 10 9 Richard A. Posner, “Theories of Economic Regulation,” Bell Journal of Economics and Management Science (Autumn 1974), p. 337. 10 See Mancur Olson, The Logic of Collective Action (Cambridge, Mass.: Harvard University Press, 1971) Chs. 1 and 2. Chapter 14 Business Regulation 19 In broad terms, the economic theory of regulation explains much above government policy—but that is one of its weaknesses. It is so broad as to limit its usefulness as a predictor. It does not enable economists to forecast which industries are likely to seek or achieve government regulation. Nor does it explain the current movement to deregulate the trucking and banking industries, or to regulate the environment. Neither of these trends appears to meet directly the demand of any particular business interest group. In general, any self-interested group will be better represented the larger its interest in the outcome, the smaller its size, the more homogenous its position and objectives, and the more certain the outcome. Regulation as Taxation According to a third theory, much of today’s regulation can be explained as an indirect form of taxation—in the sense that taxation is the government’s means of extracting money to pay for what are viewed as public goods and services. For example, until 1978, airlines were permitted to charge fares that exceeded their operations costs for long-haul flights. The extra revenues helped subsidize the below-cost pricing of short-haul flights and compensated airlines for their losses on unprofitable routes they were required to serve. In effect, some airline passengers were taxed to subsidize the fares of others. In the postal service, another closely regulated industry, revenues from first-class postage have for years offset losses on magazines and bulk mail. Again, through regulation, one group of customers is taxed for the benefit of another. Seen this way, regulation appears to be a rather clumsy way of administering national tax policy—one that raises serious questions of equity in the distribution of the tax burden. In general, transfers through “regulatory taxation” tend to go from dispersed to concentrated interests and are made as efficiently as possible, although inefficient transfers frequently occur. There is also a preference for disguising the costs imposed on victims of inefficient transfers and for broadcasting the benefits bestowed on recipients. The Deregulation Movement Recent years have seen a plethora of proposals to “deregulate”—actually “reregulate,” as some type of government intervention still generally prevails—American industry. Airline (1978), trucking (1980), and railroad (1980) rates and routes have been deregulated. The price of natural gas was decontrolled in 1986, and the elaborate price controls on oil are more or less dismantled. Banks are now permitted to pay interest on checking accounts and are almost completely free to allow market forces to determine the interest rates on all their accounts. Surface freight forwarding had its entry, exit, and pricing deregulated in 1987. Because economists have not extensively investigated the impetus for and results of deregulation, any assessment of the trend to deregulate must be considered tentative. In some cases, deregulation may have been a straightforward response to the inefficiencies of regulation. This seems a reasonable explanation for the deregulation of natural gas. The restricted supplies and shortages that characterized the industry under regulation were clearly not in the public interest. Chapter 14 Business Regulation 20 The period of unusually rapid inflation in the late 1970s may also have encouraged the movement toward deregulation. In many industries, the process of seeking approval for price increases was cumbersome and time consuming, so that regulated prices lagged far behind the current rate of inflation. Under the circumstances, industry may have preferred the more competitive and flexible market system to the comparatively rigid regulatory system. This seems a reasonable explanation for the deregulation of truck rates and railroad routes in 1980. It may also explain why, beginning in 1980, banks were allowed to pay interest on checking accounts. Bankers may not have wanted to pay interest, but they had little choice, given the high returns depositors could earn on corporate and government bonds. Another possibility is that regulated industries may simply have been outmaneuvered politically by consumer groups such as Common Cause and Ralph Nader’s Public Interest Research Group. The votes of group members may have wielded more influence with Congress than industry’s campaign contributions, especially after the size of political contributions was restricted. This may explain why the airline industry was deregulated in 1978 despite industry opposition. One regulatory agency, the Civil Aeronautics board (established in 1938), that had had economic control of commercial air transportation was even abolished in 1985. It is possible, however, that regulation has not decreased overall. In the late 1970s, the visible foot of government was stepping into such new areas as the environment, worker health, and safety. These new regulations increased the effective tax on business, and thus the prices businesses charged consumers. Without doubt, the government’s capacity to tax—that is, to impose costs on the private sector—is limited. Perhaps by deregulating some industries, the government reduced the effective tax in one area in order to increase it in others. Economic theory suggests that whenever an industry is deregulated, there will be both gainers and losers. When the price of oil was decontrolled, for example, the losers were the consumers who found their purchasing power reduced by higher prices. Unless those who are hurt by deregulation are somehow compensated for their loss, they can create strong opposition to the change. One way the head off such opposition is to tax the gainers and subsidize the losers from deregulation. The windfall profits tax may be an example of such a scheme. When oil prices were deregulated in 1980, Congress imposed a heavy tax on profits it the domestic oil industry. The revenue from the tax was to be used for research on alternative energy sources like gasohol, and for low-income fuel subsidies. Of course, the objectives and results of regulation cannot be evaluated solely in economic terms. Regulation may be intended to give citizens more influence on critically important decisions, such as the production of power, transportation, or defense readiness. Such objectives are essentially political, rather than economic, in nature. Chapter 14 Business Regulation 21 PERSPECTIVE: The Break-Up of AT&T William F. Shughart, III, University of Mississippi Before 1983, the U.S. telephone industry was a textbook example of a regulated natural monopoly. Once the basic switching equipment, trunk lines, and satellites are in place, the average cost of providing telephone service falls with increased output. Thus the industry came to be dominated by a single firm. Government regulation was justified as a way of controlling the monopolist’s tendency to charge more than the marginal cost of service. Although telephone service was regulated in the public interest, not all groups fared equally well under Federal Communications Commission (FCC) control. For example, the rate structure benefited local customers at the expense of long-distance customers. This cross-subsidy generally worked against commercial callers, whose demand for long-distance service was greatest during normal business hours, when rates were highest. Of course, AT&T benefited from barriers to the entry of new firms. But in the 1970s, the tables were turned, and AT&T itself became the victim of regulation. Judge Harold Greene’s historic decision ordering the breakup of AT&T followed a series of events that had been auguring change for over a decade. Most important was the development of microwave and satellite transmission technologies, which freed communications signals from earthbound telephone lines. In addition, since 1968 the FCC had been allowing customers to connect non-AT&T equipment to the Bell network. Throughout the 1970s it permitted new firms to compete with AT&T for long-distance service. AT&T was particularly hurt by the advent of competition in the long-distance market, which had long been among the most profitable of its operations. Discount carriers could charge less for the use of their long-distance transmission facilities mainly because they did not need to pay for switching equipment and local lines, which were owned by AT&T. In effect, MCI Communications Corporation and others were skimming the cream from AT&T’s business. By the late 1970s, then, the telephone industry was partly monopolistic (local service) and partly competitive (long-distance service)—and unworkable situation, from AT&T’s perspective. One solution would have been to include the new carriers under the FCC’s regulatory umbrella. The alternative was to break up Ma Bell, and this was the course advocated by the Department of Justice in its antitrust suit against AT&T, filed in 1974. In 1982 AT&T reached an agreement with the Department of Justice, approved by Judge Greene, which allowed it to retain its long-distance business. Its local business was divided among twenty-two local service companies. In return, AT&T was released from regulations that had prevented it from entering the computer business. The history of AT&T shows clearly that regulation is not uniformly beneficial. Under deregulation increased competition has led to a proliferation of new telephone equipment and a decline in long-distance rates. Yet higher local rates and monthly access charges for long-distance service may wipe out those short-run gains. Those who predict that local rates will eventually rise are assuming that before the breakup, AT&T was exploiting monopoly power only in the long-distance market. In other words, long-distance rates were set above marginal cost to make up for the revenue lost on local service. Differences in the profitability of the two markets may have stemmed from differences in the levels and elasticities of demand. If this latter view is correct, prices for local service may not rise. The FCC apparently continues to view local telephone service as a natural monopoly. Local service companies retain the exclusive right to provide local service. They remain subject to regulation by a variety of federal, state, and local agencies. Yet increasingly, business customers have bypassed local companies by establishing their own in-house communication services. The fact that these arrangements are viable on a much smaller scale than that of a local telephone monopoly suggests that the natural monopoly argument may no longer be valid. In any case, the availability of alternative arrangements for telephone services will restrain the local monopoly’s ability to raise prices. In sum, the telephone industry is now in a period of transition characterized by rapid changes in both structure and technology, a phenomenon well into the 21 st century. The future development of AT&T should provide some interesting examples of the effects of regulation and deregulation. Chapter 14 Business Regulation 22 MANAGER’S CORNER: The Value of “Mistreating” Customers Have you ever heard of a business consultant recommending to her clients that they mistreat their customers? Probably not. The standard recommendations consist of such advice as give customers what they want, pamper them, treat them as individuals, and never attempt to force them to do things they don’t want to do. Most of the time this is surely sound advice. But not always. More often than not in business, consultants seem to realize, business can provide more value to their customers by mistreating them -- by giving them what they individually don’t want, by ignoring their individual desires, by requiring that they do things they would not voluntarily do, and by charging them high prices for frills that cost more than they are worth. If people always consumed services individually, with the value they received from their consumption unaffected by what others do, then mistreating them would seldom be a good business strategy. But many services are consumed either together, or in the presence of others. When this is the case, suppliers should always be alert to the possible collective benefits that can be realized by both them and their customers by mistreating them on an individual basis. Putting Demands on Customers In many cases, the benefit from mistreating customers is explained by the fact that by mistreating individual customers, a supplier allows the customers to overcome a prisoners’ dilemma and be better off collectively. To see why, assume that you are the manager of a shopping mall that is soon to open for business and are anxious to attract retailers who will pay as much as possible for the opportunity to locate in your mall. This is a situation in which you should not be too accommodating to each potential customer, or tenant, in this case. A far better approach is one of creatively “mistreating” them -- requiring that they operate their stores in ways other than they would voluntarily choose if given a choice. Hours of operation are one of the most important requirements you should impose on prospective tenants. It would be unusual if all tenants chose the same hours of operation. But you as manager would be smart to require that all tenants keep their stores open similar hours. The most obvious reason is there are significant costs involved in having the mall open, and it often doesn’t make sense to incur those costs if only a few stores are open. You wouldn’t want to keep a large mall open, for example, to accommodate a convenience store that wanted to stay open all night. This is why you don’t find convenience stores operating in malls. The most important reason, however, for requiring that all tenants in the mall operate similar hours is because it has the effect of lengthening the number of hours they are open. When one store is open for business, it attracts consumers that benefit other stores. Indeed, one of the primary reasons stores like to operate in malls is they each receive spillover business from customers who came to the mall to shop at other stores. But this means that when a store is open, it is creating benefits that it is not capturing entirely for itself, and therefore a benefit that it would ignore in its own decision to stay Chapter 14 Business Regulation 23 open or close. This suggests that if left to decide on its own, each store would likely stay open fewer hours than is best from the point of view of all stores. As manager of the mall, it is your job not to ignore the spillover business that stores generate for each other. Every store can benefit if it is required to stay open longer hours than it would choose to on its own. Consider a hypothetical example in which each store owner in the mall would independently choose to keep his or her store open 40 hours a week, with the result that each store earns profits of $1,000 per week. Assume also that if any one store increased its hours to more than 40 hours a week on its own, with all other stores staying with their 40 hour per week schedule, the store staying open longer would see its cost increase with very little additional business as a consequence. Its profits would fall to $900 per week. On the other hand, if all but one of the stores increased their hours to 48 hours per week, they would each increase their profits to $1090 per week, as the mall became more convenient for, and popular with, shoppers. But the one store that remained open only 40 hours would be able to free ride on the additional popularity of the mall and would then earn $1150 profit per week. On the other hand, if all stores operated 48 hours per week, all stores would earn $1100 profit each week. Total profits are greater if all stores stay open 48 hours (assuming there are more than 15 stores in the mall), but individually each store would choose to operate only 40 hours. As the manager of the mall, you will increase the value the mall provides tenants -- therefore the amount they are willing to pay in rent -- by going against the wishes of each tenant and imposing a 48-hour schedule of operation. By imposing hours on all stores that are longer than any one would unilaterally choose, you have benefited all of the tenants by removing them from a prisoners’ dilemma. A good mall manager will be constantly alert to other areas where he or she can require tenants to do things they would not individually choose to do (or prohibit activities they would individually choose to do), but which create a more profitable setting when done by all (or not done by any). For example, individual stores may profit from having clerks standing outside their stores’ entrances and aggressively soliciting passing shoppers to come in. But if this became a common practice, all stores could suffer with consumers feeling less comfortable shopping at the mall and taking their business elsewhere. So all storeowners are collectively better off if all such solicitations are banned. They could earn more from a greater number of shoppers and more sales, so you could earn more in rent from the storeowners. On the other hand, a policy of requiring that each store in the mall advertise in the local paper (or on local TV and radio), more than any store would individually choose to do, can increase the profits of all by increasing the number of shoppers coming to the mall. The situation at a mall is similar to that in a community of home owners who are subjected to a covenant imposing restrictions on such things as the color of the houses, the type and maintenance of the landscaping, and the number of cars that can be parked outside overnight. Almost everyone living in such communities dislikes some of the restrictions. Yet people are willing to pay more to live in communities with covenants because the cost to each family of abiding by the restrictions is less than the benefit realized from having the restrictions imposed on others. . indirect form of taxation—in the sense that taxation is the government’s means of extracting money to pay for what are viewed as public goods and services. For. the need for regulation has seldom been challenged, its value to the consumer is now being questioned. Does regulation affect the competitive performance