Regular readers know that I’m skeptical of government regulation, but the reason eludes many of you since I have great concern for consumer issues. The reason is regulatory capture. Rules usually benefit large businesses, rather than tilting the playing field against them.

• Large businesses are the ones that have the resources to lobby not just legislators but regulators.
  
• They’re in a position to learn about the rules and influence them. Most consumers aren’t. And it doesn’t even make sense for consumers to do so.
  
• Large businesses can also absorb compliance costs better than small businesses can, so when they take on new rules that is a benefit – it keeps out upstart competition.

A rule that could help or hurt a business by the tune of $20 million is something that business will happily spend $1 million on if they can make a difference in its outcome. That’s an incredible return on investment! (The corollary, then, is to wonder why there’s so little lobbying rather than so much.)

On the other hand, a consumer might pay $1 more because of a rule, or benefit $2. It doesn’t make sense for any given consumer to spend on lobbyists! At that amount, it barely makes sense for most consumers to even pay attention enough to become aware that it’s happening. The benefits or costs are dispersed across too many people for them to care.

Almost invariably, the most affected parties shape the outcome of rules. They deploy arguments that make it sounds like what they’re pursuing is in the public interest. They may fund proxy groups to fight for the plausibly just cause. Along these lines, see bootleggers and baptists where the former funded the latter because evangelical Christian and Baptist preachers advocated against the sale of liquor on Sundays while the bootleggers sold illegally and wanted to protect their monopoly.

I’ve written about how this is what’s going on with ALPA, American Airlines and Southwest lobbying for regulatory crackdown on competitor JSX.

Meanwhile, I wrote about CORSIA, the program where airlines have to buy carbon credits to offset their international flying. It costs major airlines tens of millions of dollars per year.

• You’d think they wouldn’t like that! They have to spend tens of millions of dollars!

• But guess what? As I wrote, and commenter Sean M underscored, they only have to pay for growth above their 2019-2020 baseline.

• All flying by new airlines are above that baseline. So it’s a tax on new entrants into the market of international air travel. Incumbent carriers get to keep their baseline flying for free, while any new competitors pay from the get-go.

  There’s been some discussion in Australia and Canada about benchmarking new entrants against similar carriers to avoid penalizing start-ups. However, I’m not aware of a jurisdiction that has codified such a mechanism.

Regulation of an industry tends to improve market returns of incumbent companies in that industry. After all,

“as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit”

– George Stigler, 1982 Nobel laureate in economics

Commenter Sean M, who has served as an airline COO in Africa, writes:

CORSIA is a ridiculous program to begin with because of the way it treats legacy emissions as a baseline and penalises new entrants significantly to the benefit of incumbents. I have written extensively about it, going so far as to call it an attempted genocide of Africans by forcing them onto unsafe roads by adding taxes on safer air travel.

African carriers can’t start up without paying this tax, which as I noted in my earlier coverage of CORSIA isn’t just buying carbon credits but building out an extensive bureaucratic mechanism to track emissions as well. This limits growth in African aviation, limits supply of seats, and raises fares for traveling between countries. And – it’s true – that means raising the cost of safer air travel, which pushing people to travel in less safe ways. The resulting effect has long been known as statistical murder.

But airlines are able to say they’re limiting their emissions, while giving them a free pass on everything they were already doing, and imposing relatively higher costs on new competitors who might challenge them. We see this over and over and it is one reason I’m so often skeptical that regulation is going to be shaped in ways that’s pro-competitive and pro-consumer.

Do you remember the 1998 tobacco settlement between between the four largest tobacco companies and 46 states, the District of Columbia, and five US territories? It settled Medicaid lawsuits, and required the tobacco companies to pay hundreds of billions of dollars over 25 years. It also did two other things: it changed the incentives of those states, who became dependent on the revenue, to benefit from the survival of cigarette manufacturers – and new tobacco companies (who had never misled anyone about the health effects of smoking) had to pay into the settlement each year, just like the supposed bad actors. That helped protect legacy tobacco company profits by protecting them from competition. That’s the part you didn’t read about at the time.