The Most Dangerous Monopoly: When Caution Kills

Howard Baetjer,

Release Date
February 11, 2014


Lobbying & Special Interests

Everyone wants the items they buy to be safe to use or consume. When products undergo third-party certification processes to determine their safety, market forces are able to optimize the amount of testing conducted and consumers can use the information provided by certification firms to make their own decisions. It is difficult to say how much testing is enough: another test can always be run on a product, but at some point the benefit of the extra testing outweighs the costs. In a free-market system, competition among certification firms allows the market to work as it should and prevents both under- and over-testing of products. Conversely, when the government holds the monopoly on safety standards, products are likely to be over-tested, delaying their entry into the market and making them more expensive. Sometimes the costs of such delays cannot be quantified; lives can be lost while life-saving medicines are held up in safety-testing processes.

Free to Choose: A Personal Statement [resource]: Chapter 7, “Who Protects the Consumer?”
Free Our Markets: A Citizens Guide to Essential Economics [resource]: Howard Baetjer book, specifically Charpter 6 “Market Forces Regulate”
Is the FDA Safe and Effective?

: Alex Tabarrok lectures on the harm caused by the bad incentives for the FDA
The FDA Review [resource]: The Independent Institute questions whether the FDA is safe and effective with a body of research that dives in to the history of the FDA
Some resources to back up particular claims:
UL [source]: UL website – About Underwriters’ Laboratories
UL Links [source]: UL offers a page of “Additional Resources” that lists other institutions that provide certification or establish safety standards:
Replace FDA Regulation Of Medical Devices With Third-Party Certification [analysis]: Noel Campbell’s Cato policy review

The most dangerous monopoly: When caution kills
All this want insurance that the things we buy are safe. What is the best way for us to get it? One way is to have a government agency assess products and allow or forbid their sale. This is the way it works for medicines. The food and drug administration requires and oversees lengthy expensive tests of each new drug. Based on those tests it decides whether or not that drug maybe used. A different approach is to allow competing private firms to assess the products and give each one a rating. Customers decide for themselves whether to buy or not based on these ratings. This is the way it works for thousands of products from toasters and hair dryers to installation and bullet proof vests. Manufacturers hire a private certification firm such as underwriter’s laboratories to evaluate their products design and manufacturing process and to test it. If the product passes the certifier’s logo is added to it.
Manufacturers pay for private certification because it increases sales. The customers who see the logo know that the product is passed rigorous safety tests and they are more likely to buy it as a result. Stores also value assurances of product safety. They don’t want unhappy customers or law suits from selling things that turn out to be harmful. So they will pay extra to stock certified products. Certification firm such as underwriter’s laboratories have no monopoly. They have competitors. Accordingly they have a strong incentive to be cautious but also fast and affordable for manufacturers. On the one hand they depend on their reputations for trustworthiness built up over the years. A certifier who puts it’s logo on a product that turns out to be dangerous ends up with a damaged reputation and a higher likelihood that manufacturers will use a competing certifier in the future. On the other hand if a certifier is over cautious and takes a long time on costly extra testing that delays a product from getting to market or if it refuses to certify a product that turns out to be safe again it will loose customers.
Self interest pushes these competing certifiers to avoid both kinds of mistakes neither certifying dangerous products nor refusing to certify safe ones. Compare this to a government agency that has a monopoly on deciding whether a good becomes available. Its incentives are very different. What happens when such an agency approves a dangerous product that ends up causing harm? There are serious consequences for the careers of the officials who let that happen. As a result they become excessibly cautious. They take so long on costly extra testing that they do delay products from getting to market. When the product is a life saving medicine people die who could have been saved. Unlike a voluntary certification firm a monopoly government agency faces no check on this kind of caution. If the agency rejects a product that is safe or takes years for additional tests the manufacturer cannot turn to another certifier. No other certifiers are permitted. The government agency doesn’t have to worry about losing revenue or going out of business because it is funded by taxation and not by the voluntary payments of its manufacturer or customers.
How much safety is the right amount? It is always possible to test a product one more time before selling it but the test costs time and resources to run so the more the rigorous the safety testing procedures the more manufacturer must charge to cover its costs and the less money it has to invest in new products. Who should decide at what point the cost of more tests becomes too high? Under monopolized government safety regulation government officials decide. Under voluntary certification in a free market everyone decides for him or herself usually with the help of certification agencies and professionals such as doctors and pharmacists who make it their business to learn all they can about the products they advise us to use. Instead of the one size fits all approach in which the government bans all products that fail to meet arbitrarily determined criteria. The market process creates and communicates various assurances of product safety and each buyer decides for him or herself.