Asymmetrical Regulation

In a recent blog post, economist David D. Friedman made a good point about government regulation: while the ideal is a government policy of complete non-involvement in the economy, once the government does get involved, there are instances in which less regulation is worse than more regulation. The problem arises when the government provides insurance (for an investment, property) with no strings attached. The sub-prime mortgage crisis is one example of this, as Friedman explains.


Another example of this is how the government provides disaster-relief for areas which are known to be disaster-prone. This policy produces an inefficient outcome since the residents don't pay the full cost of living in such areas. Ideally, under a free-market system, local residents/communities would have to pay the cost (through insurance premiums, if they wish), which would adequately disincentivize people from living there, without the federal government being involved at all. However, being that the government is involved, a more efficient policy would be to require the local governments to pay a premium to the federal government, compensating them for their effort. This way, the federal government would impose some disincentive on choosing to live in these areas, given that the local taxes would have to be higher.