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THE COSTS AND BENEFITS OF
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Online PrefaceThis is an unofficially produced (i.e. not by the FTC) online version of the executive summary of the original Cox and Foster report. In creating this HTML version, I have tried to do this in a manner that is faithful both to the contents and to the basic organization of the original report. The full printed report was obtained in 2002 directly from the FTC by sending email to bperson[at]ftc.gov requesting: C. Cox and S. Foster, The Costs and Benefits of Occupational Regulation, FTC Bureau of Economics Staff Report (1990). Keith Eric Grant
As of August 2004, the full Cox and Foster report is available online as a Acrobat™ PDF file at <http://www.ramblemuse.com/articles/cox_foster.pdf>.
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Executive SummaryThis paper examines the costs and benefits of occupational regulation. Over 800 occupations arc licensed by at least one of the fifty states.1 When properly designed and administered, occupational licensing can protect the public's health and safety by increasing the quality of professionals' services through mandatory entry requirements — such as education — and business practice restrictions — such as advertising restrictions. This report finds, however, that occupational licensing frequently increases prices and imposes substantial costs on consumers. At the same time, many occupational licensing restrictions do not appear to realize the goal of increasing the quality of professionals' services. While the majority of the evidence indicates that licensing proposals are often not in the consumers' best interest, we cannot conclude that the costs of licensing always exceed the benefits to consumers. In considering any licensing proposal, it is important to weigh carefully the likely costs against the prospective benefits on a case by case basis. For over a decade, the staff of the Federal Trade Commission has examined the effects of licensing restrictions and provided state legislatures and regulatory commissions with comments on the benefits and costs of these restrictions.2 In general, we find that licensing is most likely to be 1. Berry (1986). p. 379. 2. Studies of licensing issues by the Federal Trade Commission's Bureau of Economics include Liang and Ogur (1987) and Bond (1980). For some recent examples of invited staff comments to various legislative bodies, see Comments of the staff of the Federal Trade Commission's Dallas Regional Office and the Bureau of Competition re Texas' Electrician and Electrical Contractor Licensing Act, Presented to Hon. Glenn Repp, House of v
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beneficial when consumers cannot evaluate the quality of a professional's services. For example, persons needing emergency health care may benefit from licensing requirements. In this situation, consumers may be unable to evaluate the quality of service, and the expected costs associated with lower than anticipated quality of service could be high. In addition, factors such as litigation, reputation, and guarantees may be inadequate to insure that consumers do not receive low quality services. If these types of market forces do not provide professionals with an incentive to provide high quality services, licensing may be an effective alternative to an unregulated market. Assuming there are significant benefits from licensing, they should be weighed against the costs, such as higher prices, that are usually associated with licensing. Mandatory entry requirements and business practice restrictions increase the cost of providing professionals' services and, as a result, increase prices as well. In the dental profession alone, the cost to consumers of restrictions on the use of dental auxiliaries was approximately seven hundred million dollars in I982.3 Because sixty occupations are licensed by most states, the aggregate cost to consumers of occupational licensure is likely to be very substantial. Other studies find consumer costs of similar magnitude for business practice restrictions in other licensed professions. One staff report by the Representatives. State of Texas (March 13. 1989); Comments of the staff of the Federal Trade Commission's Bureau of Competition re South Carolina Board of Architectural Examiners, Presented to the Legislative Audit Council of the State of South Carolina (March 13, 1989); Comments of the staff of the Federal Trade Commission's Bureau of Economics re Statutes and Regulations Concerning Agencies/Licensing Boards of Six Building-Related Trades in South Carolina, Presented to the Legislative Audit Council of the State of South Carolina (December 7, 1987). 3. Liang and Ogur (1987), p. 2. vi
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FTC's Bureau of Economics,4 for example, found that the average price for certain eye care services was approximately 33 percent higher in cities where restrictions prevent both advertising and commercial practice. An American Association of Retired Persons report estimated that in 1983 the cost of restrictions which prevent the commercial practice of optometry was over one hundred million dollars in California alone.5 We estimate that the national cost of optometric commercial practice restrictions might be as high as five hundred million dollars.6 In addition to its costs, licensing does not necessarily increase the quality of professionals' services. Many factors affect the quality of service, and licensing can only control some of these factors. For example, both the time a contractor spends in informal hands-on training and the time he spends in preparatory classes for a written licensing test contribute to the quality of service he provides. Individuals who are required to pass a written contractors' license exam may spend more time in license exam schools and less time in hands-on informal training. It is not clear that the quality of contractors' services will increase as a result of instituting written licensing exams. Moreover, many business practice restrictions, such as advertising, have been shown to be unrelated to the quality of professionals' services. Indeed, the bulk of the studies that measure the impact of certain licensing restrictions on quality find little, if any, quality 4. Bond (1980). 5. AARP (1986), p. 16 6. See pp. 32-33. vii
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enhancement.' Healey, for example, found that restrictions on the use of paraprofessionals in clinical laboratories did not improve the quality of service received by consumers.8 Even in the situations in which licensing increases the quality of the licensee-provided service, consumers are not necessarily better off. Price increases due to licensing may cause some consumers to "do without" the service, or to "do it themselves." Rather than hiring an electrician, for example, some consumers decide to do their own electrical repair work. Such substitution may result in a decrease in the average quality received by consumers. One study which examined this issue found that stricter entry requirements for electricians "are significantly associated with a rise in the rate of death from accidental electrocution.9 Given the problems associated with licensing, alternatives should be considered before licensing is adopted. No government action may be the best response in many cases, since the benefits of licensing may be small and the costs significant. Less restrictive alternatives should also be considered, because they may provide greater benefits to consumers at a lower cost. Certification, for example, provides consumers with the option of choosing a certified, higher price professional or a lower price, 7. See Martin (1982). Paul (1982). Bond (1980), Cady (1976), and Healey (1973). In fact, one study found that quality was actually higher in cities without advertising restrictions. See Kwoka (1984), pp. 215-216. 8. Healey (1973). 9. Carroll and Gaston (1981). p. 963.
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noncertified professional.10 This system allows consumers greater freedom of choice and may provide benefits on a par with licensing. Finally, although professions may have superior technical expertise in establishing and evaluating restrictions designed to raise quality, professionals often have a financial interest in self regulation. If some form of regulation is necessary, then it may be better for consumers if an outside body, rather than the profession, is responsible for administering the regulations. 10. For example, individuals can choose an accountant
or a certified public accountant to help them with their tax returns. ix
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References(see full report) |