Market regulation and protection - a return to the future: part 1.

Consumer protection, quality guarantees, the right to good services, unfair competition and the "inability" of the market. Many people are prejudiced against the market and hold politicians accountable - do it! However, few people are aware of the consequences of state regulation.

Regulation - where do we want to go?
Regulation - where do we want to go?

The most common social myth about regulation is that protects consumers from voracious traders who want to vulgarly rob the customer, the consumer. However, few people realize that the opposite is true.

The basis of a market economy is freedom of choice. Every day, every moment we choose or we are chosen. It's up to us whether we have bread or a bun, whether you write an article or go to bed, just as it is only on nichif they take you to school, take you to work or give you a vote in the election. Freedom of choice is necessary precondition for a free economy. Only the economy where there is freedom of choice is a prosperous economy.

Thanks to the fact that we can choose, there is competition and innovation. It's up to you whether you buy a Skoda or a Peugeot, but thanks to the fact that it's up to you, Skoda and Peugeot (along with other car manufacturers) try to offer you the best offer, thanks to the fact that you ( and with you several million other shoppers) you can choose, both carmakers are trying to reduce prices as low as possible, which is associated with innovations in production (modern production process reduces costs) and thus with higher quality cars (modern production process increases product quality). All this only thanks to your ability to decide freely.

In the same way, you try to improve - to educate yourself, to wear good clothes, to follow hygienic habits. Why? Because they can choose you - it doesn't matter if it 's about They in schools, at work or in a group of people of the opposite sex. However, just as you are trying to improve, the whole of society is trying to improve - so the possibility of being freely chosen increases education and generally "improves" us all, because we try to get our price as high as possible.

The market economy is a clear winner of the competition of economic systems. Let Czechoslovakia be a beautiful example - in the 40s we were at the level of France. In the 60s at the level of Italy, in the 70s at the level of Spain, in the 80s at the level of Portugal or Greece. The central model of the economy is dysfunctional.

What distinguished the central economy from the market economy was the absence of freedom of choice and competition. However, people still believe that regulating business and trade protects consumers and increases the quality of goods and services services. However, competition in this is much better, more efficient and effective than regulation.

You ask, why do I combine freedom of choice, regulation and competition? The answer is simple - regulation reduces competition, thereby restricting our freedom of choice. However, if freedom of choice is the engine of prosperity, then regulation reduces the prosperity of society.

But regulation does not reduce number market traders, or perhaps right? If it does not change the number of traders, it does not reduce competition! Of course, you can also object. However, the mistake is in your perception of competition - the market situation is not the state, it is a process! Thus - competition in the market is not a state, but a process. It does not matter whether there are one or thirty producers on the market, as long as the market is open to the entry of new producers. Those who could enter the market are potential competitionwhich drives existing producers to reduce prices and innovate - high prices generate profits and profits attract entrepreneurs to enter the market…

Restaurants and competition

There were 50 restaurants in Kocourkov. The restaurants lived happily, the people ate contentedly, everyone was satisfied. You can say that the restaurant market is definitely highly competitive, because there are as many as fifty of those restaurants! Certainly the prices will be low and the quality of the food will be high… But. You must have a license to open it in Kocourek's restaurant. And one day the councilors decided that there were already enough pubs in the city, so they would not issue new licenses.

So there were fifty restaurants and the market was closed. People worked in the city, and because they prospered, people had higher incomes, there were more of them, so they started eating more in restaurants. Out of nowhere, the restaurants were full of people. Mr. Novák, the owner of the restaurant, rubbed his hands - profits were growing and people were still walking. "Then I'll raise the price!" Mr. Novak decided. Restaurants became more expensive. But it was still full - there was a shortage of restaurants. The operation of the restaurant became demanding, so Mr. Novák had to raise the salaries of his employees. He treated them kindly, better than customers. There were plenty of customers, but such chefs, it was a scarce commodity!

People started complaining - the service is unpleasant, the food is disgusting, the insects turned the soup into a swimming stadium. However, city officials have many other concerns, and at the same time they hear from the owners of today's restaurants how the competition would destroy them, which would increase unemployment, so before they decide to do something, people prefer to stop going to restaurants.

There is no competition market condition, but by market process, in which the best companies are simply promoted. It doesn't matter how many companies are on the market right now, it depends mainly on the openness of the market, so only an open market is a competitive market. It is beautiful to see right here in the Czech Republic. According to one recent report, MS Internet Explorer's share of the Internet browser market in the Czech Republic fell below 50% for the first time. It's not that long since MSIE occupied over 90% of the market. After gaining this dominant position, however, its development began to stagnate, which led to a reduction in the quality of this program. Competition in the form of many other browsers appeared on the market so quickly. The largest of these, Mozilla Firefox, now holds over 34% of the market. The main thing, however, is that MSIE's almost monopoly position certainly did not mean that the browser market was not competitive. Maybe about that today no one doubts.

While the web browser market is an open market, licensed markets are simply not open. Thanks to licenses, famous taxi drivers from Prague do not have strong competition, so they set (set?) "Exaggerated" and "immoral" prices. And there are quite a lot of those taxi drivers.

In České Budějovice at the end of the XNUMXs, the town hall was dealing with a precarious situation - it had two opposing petitions in front of it. One wanted the city to promote the construction of new shopping centers, the other wanted this construction to be limited. The first was written by consumers, the second by retailers. Consumers argued for lower prices in supermarkets, retailers argued that large malls reduced their sales, that retirees and those who did not have cars would rely on someone else's shopping help that they would have to lay off…

How would the second petition turn out if retailers simply admitted that they were afraid of their own profits? Large shopping centers will destroy only those retailers who are unable to adapt to the new conditions and find a gap in the market (ie only those who are not good traders). For the others - after all, the supermarket is so impersonal…

Governments should follow that they must not close markets to new competition. Just open markets are a guarantee of efficiency, closed markets are rigid and inefficient, because inefficient producers survive on them for a long time - so not only human resources are wasted. A beautiful example from the Czech Republic is railway transport and the "miracle efficiency" of Czech Railways.

Very often, regulation is hidden under the concept consumer protection. What? Consumer protection and regulation? Yes, I will give an example again - protection of passengers by compulsory insurance of travel agencies.

Previously, we did not have compulsory travel insurance against bankruptcy. There were several thousand travel agencies in the Czech Republic at that time, and approximately every year 1% went bankrupt. A media massage about passengers whose bankruptcy went bankrupt led politicians to take action - they enacted compulsory insurance for travel agencies. Of course, the travel agencies reflected this fact in the prices. Before compulsory insurance, careful people booked tours for large travel tickets, the more daring ones took advantage services those smaller companies. Here, however, the state decided for us - he said that the state is smarter than ourselves, and he himself decided what is actually good.

What are the consequences of this decision? In 2004, 150 travel agencies ceased to exist. 45 new ones were created. It is very difficult for new entrepreneurs to enter the market - insurance is expensive for them (it is a risk for insurance companies), more capital is needed to set up a travel ticket and it is difficult for new entrepreneurs to obtain it.

Do you think that the introduction of mandatory seat belts has reduced the number of accidents? No, that's not the case. The number of fatalities in drivers has decreased, however the number of pedestrian fatalities has increased - drivers are compulsorily protected by seat belts, so why not enjoy a faster ride…

As we have already said, regulation is often hidden under a kind of consumer protection. The American economist Geirge Stigler approached the issue of regulation in a somewhat original way - he did not ask if regulation was desirable, but he examined who demands regulation. He came to the logical conclusion - the state does not regulate "to order" the consumer, but "to order" the manufacturer. Does it seem illogical to you? You say why on earth would a manufacturer want to be regulated?

The explanation is simple - regulation reduces competition, which brings benefits to current manufacturers. Regulation protects manufacturers from competition, because the state controls the entry of new producers into the market and requires them to meet many conditions, which also makes market entry more expensive. Who is most opposed to deregulation when it is talked about in a sector - the consumer or the producer? It is always the producers who are most opposed to deregulation. Czech Railways is an example of this.

Manufacturers do not want open markets, and it is their lobbying that is behind the vast majority of regulations. Critics of central banking also point to banking lobbying, which is still fighting to strengthen the regulatory competencies of central banks.

Next time, we will look at dumping, protection of competition and, perhaps, medical licenses.