Regulation as Congestion

I’ve been thinking a bit more about the analogy of regulation as throwing small pebbles into a stream, and if you throw too many pebbles in, the stream can be dammed up.

Maybe this is related to the idea of congestion pricing in transportation. Each additional vehicle imposes a negative externality on other vehicles using the same road, so many transportation economists have supported the idea of using variable tolls or congestion pricing to give drivers the correct incentives.

In the same way, maybe we can give regulators better incentives by adjusting cost-benefit analyses for the negative externalities of regulation. The question then is the size of the negative externality factor.

Traffic engineers tend to study congestion using turbulence models. These models can give a variety of different behaviors, include sharp shifts in phase where traffic suddenly shifts from free-flowing to congested to stopped. I do wonder whether there is an analogy for regulation…hmmm.

 

 

 

 

 

Comments

  1. Mike don’t know if you are familiar with the concept of dead capital, but basically it is regulations that hinders $9.3 Trillion in value for the developing world.

    thought you may be interested. http://livecapital.wordpress.com/

    Here is the world bank index of red tape for starting businesses in various countries.
    http://www.doingbusiness.org/reports/doing-business/doing-business-2011

  2. Hi Mike,
    Just extending your traffic analogy. I live in a city where there are no tolls but a lot of road work going on. This often causes slow points that can lat for weeks at a time. It is remarkable though how quickly traffic balances across alternative routes so that everyone goes a little bit slower but traffic no longer backs up at the slow point. This is called freedom to choose. Your toll analogy smacks of social engineering with a bit of taxation thrown in.
    That being said I agree with your pebbles of regulation analogy. I have been reading “Wealth of Nations” over the last few weeks (sometimes a slog but Mr Smith does have a lovely dry sense of humour and it surprising how little has changed over the last 150 or so years) and his point about regulation is that it is generally motivated by one set of merchants looking to get a commercial advantage over another. It is seldom designed to serve the economy as a whole, and usually operates to the detriment of the overall economy.
    It may be an interesting lens to use when looking at regulation to view “who benefits”. I’d be willing to bet that generally speaking we will see one bunch of merchants looking to steal a march on another lot!

  3. I like the idea, although I favor simplicity whenever possible. Take Financial regulation: what was ultimately produced in the aftermath of the crisis was a hodgepodge and a patchwork of complcated details. To eliminate speculation and a failure of fiduciary duties why not just eliminate “naked” positions. That way those that truly benefit from the use of derivatives as hedging or insurance aren’t hindered and the trader whom buys multiple CDS’ on the same crappy bond doesn’t magnify the cost of failure, while incurring a negligible capital charge.

    In regards to fiduciary duty make personal assets liable in the event of outright failure and negligence. Keep the winnings but take the losses too. Modern corporate structure such as LLC’s and the corporation itself make personal recourse and responsibility very hard to achieve.

    Just a thought.

  4. Another possible interpretation is the GFC was a crisis for some specific mercantile interests that were politically well enough connected to get the public to absorb their losses. Too Big to Fail is a narrative propogated by these interests to bolster their case for public money. On this basis no further regulation is required.
    I also hear other otherwise rational capitalists suggesting a Tobin tax to impede high frequency trading. A better solution IMO would be to let a stock exchange advertise itself as HFT-free, thereby attracting money from genuine investors who don’t want to be involved in a traders market.

  5. Actually regulation is like having rules of the road, for example driving on the right or left, stopping for red lights and the like. You actually can go faster when roads are crowded if you drive on the wrong side of the street as I learned on one terrifying cab ride to Logan airport. It is generally possible to save time by running red lights as the other people will usually brake or swerve in time. Of course, if no one obeys any traffic laws, you tend to have horrible congestion and other problems.

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