The social cost of uniform regulatory standards in a hierarchical government

Abstract

Regulatory agencies charged with public health and safety typically promulgate uniform regulatory standards, which suggests the agencies are concerned mainly to reduce harmful externalities, with little concern for firms' costs. A focus on benefits, to the exclusion of costs, in standard-setting and enforcement leads to inefficiencies. We show that, even when the legislature cannot peg the budget to a specific enforcement policy, it can reduce the distortions by limiting the enforcement agency's budget and by permitting the agency to partially self-finance from rebates of noncompliance fines.