The Consequences of Ignorance in Regulatory Design: The Ethical Duty to be a Realist

• Author: Andrew P. Morriss
• Position: Professor, Bush School of Government & Public Service and School of Law, Texas A&M University
• Pages: 717-739

The Consequences of Ignorance in Regulatory

Design: The Ethical Duty to be a Realist

ANDREW P. MORRISS

*

ABSTRACT

Regulators have a duty to be realistic in the design of new regulatory solu-

tions. This includes taking account of costs, effectiveness, and the capacity of

the government which will be charged with implementing the proposed solution.

Not considering these factors leads to failures which may well worsen the situa-

tion the regulation was supposed to improve. Using three case studies of regula-

tory measures, this Article explores the requirements of the duty to be realistic.

TABLE OF CONTENTS

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 717

I. THREE EXAMPLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 721

A. Externality-Reduction Regulation: Diesel Engines. . . . . . . . . 721

B. Anti-Monopoly Regulation: Public Utility Pricing . . . . . . . . . 723

C. Preventing Evasion of Regulation: Anti-Tax-Avoidance

Measures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 725

II. MULTI-DIMENSIONAL REGULATORY ANALYSIS . . . . . . . . . . . . . . . . 728

III. GOVERNANCE CAPACITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 730

IV. MULTI-DIMENSIONAL REGULATORY ANALYSIS (AGAIN) . . . . . . . . . 733

CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 738

INTRODUCTION

Several decades of teaching and writing about regulation have left me con-

cerned about the lack of progress in the academic literature on regulation. Both

popular and academic discussions of regulation usually portray regulatory

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* Professor, Bush School of Government & Public Service and School of Law, Texas A&M

University. A.B., Princeton; J.D., M.Pub.Aff., The University of Texas at Austin; Ph.D. (Economics) M.

I.T.; M.Ed.Pysch., Texas A&M University. Thanks to Susan Dudley, Roger Meiners, Julia Woislaw,

and participants in the symposium for comments on earlier drafts. © 2021, Andrew P. Morriss.

choices as conflicts between lax and strict regulation.

1

Portraying regulatory

choices this way simplifies the narrative and makes telling a regulatory or deregu-

latory story much easier. It provides a villain: either an evil bureaucrat (seeking

to crush entrepreneurial activity by making regulations “too strict”) or a corporate

profiteer (seeking to despoil the landscape and poison workers and neighbors by

pressuring governments into making regulation “too lax”). It also provides a

hero: either the publicly spirited reformer seeking “tough” regulations on bad

actors or a deregulatory crusader liberating the entrepreneurial spirit of economic

actors crushed by oppressive regulation. The public can easily tell for whom to

root. The solution is similarly straightforward: If only the right regulators could

be put in charge of the process, we could achieve the optimal level of regulation.

“ ” “ ”

Economists (like me) bear some of the blame for the dominance of this sim-

plistic narrative. Most economics courses and publications illustrate regulatory

policy issues with a graph like Figure 1. The plot indicates that the presence of an

externality has caused the market to produce a suboptimal result. By applying the

right policy (a tax, a subsidy, a quantity limit, etc.), regulators can move society

to an optimal equilibrium, ideally a Pareto-optimal one. More advanced econom-

ics texts add some fancy math, but they tell essentially the same story: society is

not at the optimal equilibrium. Applying the right policy can fix that. Therefore, a

regulation that is neither too lax nor too strict should be created and bring us

closer to equilibrium.

1. The examples are so numerous that a footnote seems superfluous. Here are some representative

examples from the past two years across diverse fields, including environmental law, energy law,

financial law, and sports law. See, e.g., Hannah Ford-Stille, Regulated and Hydrated: A Case for

Regulating Bottled Water, 60 SANTA CLARA L. REV. 325, 347 (2020) (“[L]ax and inconsistent

groundwater regulations combined with FDA’s dereliction of enforcement will ultimately converge into

a larger issue—health effects.”); Yosra Abid, Reflection on Shale Gas Fracking Risk Assessment and

Management in the United States, 11 WASH. J. ENV’T L. & POL’Y 1, 11 (2020) (“Lax fracking

regulations are at the origin of fracking-data gaps and absence of reporting requirements. Risk

assessment tools (e.g. predictive models) have purposefully been omitted in statutes and regulations

governing fracking activities.”); Michael Greenberger, Too Big to Fail—U.S. Banks’ Regulatory

Alchemy: Converting an Obscure Agency Footnote into an “At Will” Nullification of Dodd-Frank’s

Regulation of the Multi-Trillion Dollar Financial Swaps Market, 14 J. BUS. & TECH. L. 197, 379 (2019)

(“Because of the laxity in EU financial regulatory rules, EU country banking systems have shown

substantial weakness under the EU financial regulatory paradigm.”); Robert I. Correales, Broken Bodies

and Broken Dreams: How Social Safety Net Programs Subsidize Professional Boxing and the Need to

Improve Legal and Health Protections for Prizefighters, 19 TEX. REV. ENT. & SPORTS L. 107, 119

(2019) (“The inadequate patchwork of state-by-state regulation had enabled unscrupulous characters to

shop for states with lax regulations, endangering the economic and personal well-being of professional

boxers.”).

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