In my paper on the Regulatory Improvement Commission, I argued that adding new regulations was like tossing small pebbles into a stream. Each pebble by itself would have very little effect on the flow of the stream. But throw in enough small pebbles and you can make a very effective dam.
Why does this happen? The answer is that each pebble by itself is harmless. But each pebble, by diverting the water into an ever-smaller area, creates a ‘negative externality’ that creates more turbulence and slows the water flow.
Similarly, apparently harmless regulations can create negative externalities that add up over time, by forcing companies to spending time and energy meeting the new requirements. That reduces business flexibility and hurts innovation and growth.
For example, consider the ‘bill shock’ regulations now under consideration by the FCC. ’Bill shock’ is when someone gets a mobile bill that is higher than they expected—say, a large roaming charge. This problem is annoying but not life-threatening.
In response to consumer complaints, the FCC invited comments on regulations that would require ”customer notification, such as voice or text alerts, when the customer approaches and reaches monthly limits that will result in overage charges,” and “ require mobile providers to notify customers when they are about to incur international or other roaming charges that are not covered by their monthly plans, and if they will be charged at higher-than-normal rates.”
One question is whether bill shock is a widespread problem. A just-released study, “An Empirical Analysis of Overages on Wireless Consumer Bills” by Recon Analytics suggests that most overages are relatively small and not repeated. What’s more, in many cases it makes financial sense to take a small overage, rather than switch to a more expensive plan. The study reports that “only 0.3% of wireless accounts go into overage during a year by such an amount that the customer would have been better off having upgraded their plan for that year.”
Now, here’s where we come to the tale of the pebble and the stream. The rule of thumb about IT projects is that they are always more complicated and take longer than you think. More precisely, it would be a major and costly effort to build a system that in real-time accurately tracks customer total charges on the home system and on domestic and international roaming systems. The key words here are ‘real-time’ and ‘accurate’ in the same sentence—the two together translate into expensive.
The bottom line is that if the bill shock regulations are enacted, significant resources—IT personnel and dollars–would be diverted into building and maintaining this real-time/accurate charge tracking system. The number of beneficiaries—the people who are truly surprised by ‘bill shock’– would be relatively small.
What’s more, these are resources that would not be available for innovation and improvements to the whole network. This negative externality—the potential slowdown in innovation and the pace of network improvements– is not measured as part of conventional cost-benefit analysis. Depending on how many other regulations are being enacted, it could be another pebble that helps dam up the stream.
Indeed, this suggests we should not evaluate regulations one at a time, but rather as part of a larger context. Think of the impact of a regulation as the net benefit of that regulation plus a negative externality E. That negative externality sums over all regulations on that industry. The more regulations, the bigger the negative impact.
From that perspective, in order to meet President Obama’s goal to eliminate regulations that hurt job creation, conventional cost-benefit analysis is not enough. Agencies such as the FCC need to look skeptically at the bill shock rule and other borderline regulations that could impose genuine negative externalities on job growth and innovation without helping many people.